Applying Prices Equation in empirical research

Perspectives on decomposition analyses of productivity change

Jacob Rubk Holm Version of September 28, 2010

Abstract This paper discusses and demonstrates how Prices Equation may be applied in productivity studies. It derives and discusses the interpretation of the mathematics of the equation. Hereby it combines evolutionary theorizing on generalized Darwinism with the vast literature on decomposition studies of productivity change. It is shown that the inter rm reallocation eect of decomposition studies describes a special case of generative selection where tness is a linear function of productivity. It is discussed how the recursive formulation of Prices Equation allows decomposition studies to explicitly take into account that not all rms are competing with each other. They are part of dierent populations. And it is demonstrated how the evolution of Danish productivity from 1992 to 1999 can be decomposed, taking into account that rms competing on the basis of labour productivity are competing not with all other rms but only with those employing similar production processes.

Introduction
The central part of George Prices general mathematical theory of selection is Prices Equation.1 The equation species a decomposition of the change in a weighted mean characteristic of a population from one point in time to another. Within economics there are not many explicit references to Prices work. The few that refer to Price generally deal with theorizing on industrial dynamics. In empirical work, however, there is a vast literature already implicitly employing Prices Equation for the decomposition of productivity change without explicitly noticing the kinship of decomposition techniques and Prices Equation. It
Department of Business Studies, Aalborg University. jrh@business.aau.dk sometimes called the Price equation. As this term may be confusing in economics it will not be used in this paper.
1 Also IKE,

is thus necessary to evaluate the additional insight into decomposition studies that is already available from the interpretation of Prices Equation. The contribution of the present paper is to highlight the close relationship between Prices Equation and decomposition studies and to evaluate the insight gained from acknowledging that these studies in fact apply Prices equation. In the following section Prices Equation will be formally presented and its relationship to the methodology used in productivity decomposition will be demonstrated. Then, in section 2, the interpretation of the equations components as suggested by an evolutionary perspective will be discussed. Section 3 provides some methodological considerations and presents the data used, and in section 4 the results of decomposing the evolution in Danish labour productivity from 1992 to 1999 are presented. Section 5 discusses the results and evaluates the additional insight to productivity decomposition generated by Prices Equation.

Prices Equation and its relatives

Prices Equation was rst developed as a tool in biology for modelling the evolution of gene frequencies but was also propagated as a contribution to a general mathematical theory of selection with application in all forms of evolutionary analysis not just the biological sort (Frank, 1995; Price, 1995, 1970). In biology it has since been applied not just in modelling but also in empirical research, mostly with the aim of supporting the results from modelling eorts (van Veelen, 2005). Within economics two dierent strands of literature employing Prices Equation may be identied. Some researches include it in discussions related to generalised Darwinism as a tool for studying the evolution of routine frequencies an approach very similar to the original application where it was envisaged as a tool for studying the evolution of gene frequencies. Examples of such literature are Hodgson and Knudsen (2006b) and Knudsen (2004). Another strand of literature on Prices Equation in economics employs it in modelling the evolution of a characteristic (which tends to be some measure of productivity) within a population of rms. This strand is related to the literature on agent-based/simulation models of economic evolution in the sense that it discusses Prices Equation as en extension to the replicator dynamics of such models. The equation thereby becomes a tool for mapping the balance between intra rm and inter rm forces in the evolution of productivity. Examples in this vein include Metcalfe and Ramlogan (2006), Metcalfe (1998, 1994) and Andersen (2004). There are so far no empirical applications within either of the two strands identied above. There is however a very large third strand of literature on accounting for productivity growth by decomposing productivity change into a number of eects. There are several equations in use for decomposition in the literature. The equations are all similar in that they strive to decompose productivity change into an inter rm component, an intra rm component and the eects of entry and exit. The equations dier in the balance between ease of interpretation versus robustness to measurement error but there is one equation in particular, which is included in most research and even often employed as

the only equation.2 This equation may readily be rewritten as Prices Equation and thus any insight gained towards interpretation of Prices Equation can be used here as well. This specic equation was rst suggested in Foster et al. (1998) in which a thorough study of the evolution of American productivity is undertaken.

1.1

Examples of decomposition studies

The study by Foster et al. (1998) decomposes both labour productivity and total factor productivity growth (TFP) in a number of American manufacturing and service industries and the research is extended in Foster et al. (2002) to the US retail industry. In the later study, however, only the change in labour productivity is decomposed. Other studies of manufacturing industries include Disney et al. (2003) for the UK and Cantner and Kr uger (2008) for Germany, while Andersson (2006) conducts a study of productivity growth in the entire Swedish economy. Other studies have sought to perform international comparison, for example Scarpetta et al. (2002), which is a study of the manufacturing and service sectors of select OECD countries without disaggregating to specic industries. A similar analysis based on OECD data is presented in Bartelsman et al. (2004). A common justication of studying productivity growth by decomposition analysis is that it can contribute insight into the idiosyncratic industry dynamics underlying the well-documented, large and persistent dierences in productivity among rms and industries (see e.g. Syverson (2010) and Bartelsman and Doms (2000) for discussions of the heterogeneity). As population dynamics are precisely what George Price sought to quantify mathematically it is very reasonable to expect his general mathematical theory of selection will contribute to the understanding of the decomposition literature.

1.2

Prices Equation

The classic reference for Prices Equation is Price (1970) but this preliminary communication is quite short and directed at biology, whereas the posthumously published Price (1995) elevates the discussion to a much more general level.3 It is not easy to say when Prices Equation was rst applied in economics. Several applications of replicator dynamics in evolutionary game theory come very close to Prices Equation without actually referring to it and much work in the 1990s by J. S. Metcalfe explicitly employ Prices ideas in model building; e.g. Metcalfe (1998, 1994). For an example of Prices Equation in game theory see Bowles (2004) ch. 13. For a formal documentation of the relationship between Prices Equation and, inter alia, replicator dynamics and the Lotka-Volterra equations of evolutionary game theory see Page and Nowak (2002). The variety of contributions means that there is a wide array of notations being used for Prices Equation. I will adhere to the following notation, which comes very close to the notations of Andersen (2004) and Frank (1995): Upper case letters denote population level means at the highest level of aggregation and lower case letters denote rm level values and means of sub-populations.
formal presentation of this equation follows section 1.3. is not that Price did not publish more on his work during his lifetime. But the exposition in Price (1995) with the accompanying paper by Steven Frank (Frank, 1995) is a very thorough exposition of the selection mathematics developed by George Price.
3 It 2 The

Table 1: Denitions Formal xi zi X si wi zi Z Z W Cov (wi , zi ) = = = =

i

Description
Firm size Firm productivity

xi

Population size Firm share Firm tness (growth rate plus one) The evolution of productivity

= xi /X x i /xi
zi

zi
i si zi

= E (zi )

Population (mean) productivity The evolution of pop. productivity Population tness

= Z Z = X /X =
i si (wi

W )(zi Z )

Covariance of tness and productivity

Adding a prime to a variable denotes the end year, as opposed to the base year, and a prexed denotes the dierence between base and end years. The subscript i denotes rms and subscript j denotes sub-populations (i.e. industries). Cov (ai , bi ) is the population covariance between random variables a and b weighted by rm size and E (ai ) is the population mean of a weighted by rm size, i.e. it can also be written as capital A. Table 1 contains the descriptions as well as the mathematical denitions of the components of Prices Equation. Equation 1 is Prices Equation in the form where it can be used to decompose the change in productivity into an inter and an intra rm component. Cov (wi , zi ) E (wi zi ) + (1) W W The change in population level labour productivity between the base and end years is equal to the sum of two terms.4 The rst term is based on the covariance between growth and productivity and is referred to as the selection eect or the inter rm eect. It indicates to what degree the growth of aggregate productivity can be attributed to relatively high productivity rms growing more than relatively low productivity rms. The second term is sometimes referred to as the innovation eect or the intra rm eect. It is the part of productivity growth that may be attributed to processes internal to rms. It will be argued below that it is better to label this term as the learning eect but during the below formal presentation of Prices Equation it will be referred to as the innovation eect. At this stage an insight can already be added to the literature on productivity decomposition: the inter rm eect is dependent on the covariance of rm growth and productivity in the base year. If the relationship between productivity and growth is not linear this covariance will be weak even if growth is highly Z =
4 Proof that the change in a weighted mean may be decomposed in this manner and that Prices Equation is thus an identity is given in the appendix to Andersen (2004) and will not be repeated here.

dependant on productivity. The decomposition will then ascribe too little of the change in population mean productivity to the inter rm redistribution of resources following from dierences in productivity. An alternative specication of Prices Equation is reached by multiplying by W and is given in equation 2. W Z = Cov (wi , zi ) + E (wi zi ) (2)

The interpretation of what exactly is being decomposed is a bit more tricky in equation 2 than in equation 1. It could be interpreted as the gross change in welfare contribution of the population: the change in mean productivity multiplied by the size growth. Notice that the expression within the expectations operator on the right is the rm level equivalent of the population level term on the left. This means that Prices Equation can be substituted, very elegantly, into itself as many times as the researcher may desire and thus allow for a multilevel study of evolution. It is thus possible to describe each agent of the population as a population in its own right. Most studies employing productivity decomposition map how industry level productivity has changed through inter and intra rm processes. A few provide separate evidence on how even more aggregate mean productivity has changed by inter and intra industry processes. But Prices Equation illustrates how both levels of dynamics and even additional levels may be mapped in just one decomposition. Multilevel application will be explored later in this paper and for this analysis equation 2 will be expanded and rewritten so that it once again becomes clear just what is being decomposed.

1.3

The road to decomposition

Prices Equation as specied in the previous section cannot be applied directly to rm data, as two crucial phenomena in the evolution of a population of rms is not taken into account in this form. These are entry and exit. In order to take these phenomena into account it is necessary to distinguish between three sets of rms: Those that exist in both the base and end years, those that exist in only the end year and those that exist in only the base year. These sets will be labelled the C , N and X sets respectively (C ontinuing, eN tering and eX iting). The two terms of Prices Equation refer to the contribution of the C -set to productivity growth. in order to specify the contributions of the N and X -sets it helps to expand the covariance and expectation terms so as to make explicit which rms are included in the computations. The covariance and expectation operators in equation 1 can be expanded to Z = and so Z =
i i si (wi

W )(zi Z ) + W

i si wi zi

W si (wi /W )zi
i

si (wi /W 1)(zi Z ) +
x X i xi / X

and as si wi /W =

xi X

= s i (s i si )(zi Z ) + s i zi
i

Z =
i

in order to indicate that this only refers to rms present in both end and base years Z = si (zi Z ) + s i zi
iC iC

and adding the contributions of the N - and X -sets Z =

iC

si (zi Z ) +
iC

s i zi +
iN

s i (zi Z ) iX

si (zi Z )

(3)

The four terms of equation 3 thus correspond to the selection and innovation eects, and the eects of entry and exit. The entry eect will contribute positively (negatively) to productivity growth when the productivity of new rms is higher (lower) then population productivity in the base year. The exit eect will contribute positively (negatively) when rms exiting the population have productivity lower (higher) then population productivity in the base year. Equation 3 is almost identical to the decomposition technique introduced by Foster et al. (1998) and used in the studies mentioned earlier. The only dierence is that the innovation eect is typically divided up into two dierent terms, as in equation 4. s i zi =
iC iC

si zi +
iC

si zi

(4)

The rst term on the right hand side of equation 4 is termed the intra rm eect and the second term the cross level eect. The cross level eect is also sometimes referred to as a covariance term but as it is the inter rm selection eect that may by rewritten as a covariance scaled by population tness, this label for the cross level eect is misleading. The justication for separating the cross level eect from the intra rm eect is robustness to measurement error. As the aim of the present paper is to evaluate the insight from Prices Equation for productivity decomposition the innovation eect will not be split up in the decompositions performed in the present paper. Another problem with equation 3 is that there may be multiple forms of entry and exit. It is not certain that a rm that appears for the rst time in an industry is newly set up. It may very well have been operating in another industry for some time before the relative importance of its various activities evolved so that it was reclassied in the statistical industry classication system. And a corresponding problem holds for exits. This problem could be taken into account by dening two additional sets of rms so that there would be two sets of exiting rms and two sets of entering rms. These would be based on whether the rms close down or not when exiting and whether the rms are newly set up or not when entering. The data used in this paper allows for the identifying the both types of entry and exit (the data will be formerly described in section 3.2). The question is, however, whether this complication is justied. It does not seem warranted to add extra terms to the decomposition unless these represent eects that have particular interest. The focus here is on the extra insight into productivity decomposition gained from Prices Equation and thus the complication of multiple entry and exit eects is avoided. Thus the equation used to decompose the evolution of productivity in single level populations in the current paper will be equation 3. But before demonstrating the technique and presenting the results the interpretation of the terms will be discussed. 6

The evolutionary interpretation

Prices Equation is for mapping how a characteristic changes over time in an evolving population. This does not mean that the interpretation of the decomposition needs to have analogies with biology but it means that the focus of the analysis necessarily is on populations and the dynamics within them rather than on the agents of the population. Employing such a population perspective entails recognizing that there are irreducible forces at the population level that are lost if focus is only on the individual agents (Andersen, 2004; Zinovyeva, 2004). In evolutionary economics these population level forces are conceptualized as the forces of competition and thus competition is conceptualized as a process (as opposed to competition as a state). The process of competition is what drives economics evolution.

2.1

Creating, sorting and consuming variety

Competition is an open ended process of novelty generation and reallocation of productive resources. Firms perform innovations in attempts to gain decisive competitive advantages over competitors. They change their strategies based on the innovation of these same competitors and in anticipation of future actions by competitors. And also in response to and in anticipation of changes in conditions external to the population. Firms prosper or decline as a result of the interaction between their own innovation activities, the innovation activities of competitors and the external factors setting the premises for the interaction. Competition may thus be characterised by three mechanisms: the disequilibrating mechanism of novelty creation, the equilibrating reallocation mechanism of rms being evaluated in market competition and retention in the sense of characteristics of successful rms being retained within the population. These three elements of industrial evolution; innovation, selection and inertia, are not all captured equally by decomposition studies. The rst element, innovation, is consigned to the intra rm eect and treated more or less as a black box: decomposition aims to map the population level dynamics of productivity growth. Not the intra rm processes. Inertia is not considered explicitly either. If there is to be selection based on productivity it is necessary that productivity is not a wildly uctuating characteristic of a rm but rather, productivity needs to be a parameter upon which rms can be credibly distinguished from each other. Whereas decomposition thus tells us little about the innovation and inertia elements of industrial evolution it quanties the selection element with a few caveats: decomposition quanties only linear, single factor selection. I.e. decomposition tells us nothing about non-linear eects of productivity upon differentiated growth rates and it tells nothing about other sources of dierentiated growth. There are various approached in evolutionary economics to the application of a population perspective and evolution through competition. These range from those working to generalise biological evolution into a set of principles that apply to all occurrences of evolution a generalised Darwinism (Aldrich et al. (2008); Hodgson and Knudsen (2006b)) while others argue for constructing a general theory of evolution of which the biological and economic sorts are particular occurrences (Winter (1987); Witt (2003), ch. 7).5 .
5 Winter

(1987) constructs a tongue-in-cheek evolutionary model of a library arguing that

Although these approaches are not, on the face of them, radically dierent or even mutually exclusive there is nevertheless ample room for controversy, as e.g. the discussions in Buenstorf (2006) or Hodgson and Knudsen (2006a) show. In this paper I will attempt to tread the middle ground and apply the following denitions inspired by my reading of this literature. Evolution is open ended, internally propelled change over time of a characteristic in a population. Thus Z is evolution. There are two types of selection: subset selection; when the units being selected upon are divided up into winners and losers and generative selection; when the distinction between winners and losers is a matter of degree. The selection eect of equation 3 is thus an expression for generative selection (growth, w, determined by the ranking according to productivity, z ) in the evolution of Z , whereas the exit eect is the more radical form of selection, subset selection. The process of selection consumes variety. Subset selection obviously decreases variety while generative selection should, in the extreme case of rms with xed productivities, make the distribution of productivity collapse upon the optimal (i.e maximum) value. That is, all resources are put to work in the most productive way. The real world is however far removed from the extreme case: novelty is constantly being generated and adds variety to the selection process. Equation 3 allows for two sources of variety: change within existing rms (the innovation eect) and the entry of new rms (the entry eect). That variety is the fuel of evolution is intuitively straightforward but it may also be demonstrated mathematically, as is done e.g. in chapter 2 of Metcalfe (1998). Not only does Metcalfe show that growth in mean performance (when there is no novelty being introduced) can be mathematically linked to the variance of performance, he also shows that the decrease in variance is proportional to the skewness of the distribution. An important caveat applies to the interpretation of the innovation and entry eects as contributors of variety. In an economic sense innovation is any activity that leads to the creation of (possibly negative) quasi rents. The innovation eect in equation 3 thus captures more than just economic innovation. It captures any intra rm change, including adaptive changes to environmental shifts.6 Thus, intra rm change is not just innovation but learning in a broader sense. Thus, I shall use the term intra rm learning eect. Similarly, the entry eect captures the eect on productivity by new rms regardless of whether these bring novelty or are mere clones of existing rms. This theoretical ambiguity means that the magnitude of the innovation (or learning) eect will be sparsely interpreted. Focus will be on whether the selection eect captures inter rm processes suciently and the insight gained from multilevel application of Prices equation.
One could just as well, however, take evolutionary bibliography as the prototypical evolutionary science ... (p. 615) 6 This caveat is very general for Prices Equation though it is more obvious in its original application in biology than in economics. When studying gene frequencies one must take into account that the selection environment is constantly changing and that the genes that are benecial for survival and/or reproduction in one selection environment may not be in other selection environments. Thus Prices Equation should be used to study evolution over relatively short time spans. High productivity, on the contrary, is generally a competitive advantage for rms, as it provides a ceteris paribus cost advantage.

Some considerations

zi is the productivity of rm i. But it matter a great deal just how this productivity is measured. Productivity as a parameter for competition generally refers to costs: the more output a rm can generate from given inputs the lower its costs and thus the better its competitiveness. This is straightforward when studying the evolution of labour productivity by decomposition: the competitive advantage assumed to determine generative selection in the population is a cost advantage achieved by lower labour requirements. If, on the other hand, one is decomposing the evolution of total factor productivity (TFP) using decomposition the interpretation of economic selection is more open to theorizing. TFP advantages can be argued to stem from the rms ability to innovate and competition thus takes on a more dynamic character with more innovative rms outgrowing others.7 When decomposing changes in labour productivity the inter rm selection eect should only be interpreted as the eect of generative selection acting on rms with cost advantages while when decomposing changes in TFP it could arguably also be interpreted as the eect of generative selection acting on more innovative rms. It is very common in the literature to decompose both the evolution of labour productivity and TFP but the dierences in interpretation of the decompositions are not commonly heeded. And, as a further complication, the way in which labour productivity or TFP is measured matters to the interpretation as well. Labour productivity is commonly measured as the log of output per unit of labour input while in a few instances (e.g. Andersson (2006)) it is simply output per unit of labour input. The interpretations dier in that in the former case competitive advantage is relative while in the latter case it is absolute i.e. using logs means that the eect on generative selection of a 10 percent. cost advantage is independent of cost level, while not using logs means that the eect of a 1,000$ cost advantage is independent of cost level. Intuitively, using logs looks like the right approach. But this means that the worst performing rms are automatically censored from the data as only rms with positive output can be used.8 In section 4.1 the correlations of labour productivity and rm growth rates with and without the logarithmic transformation will be compared, and it will compared to the Spearman rank correlation (), which is robust to monotonous transformations, such as the logarithmic. will thus measure whether there is a tendency for more productive rms to grow more than less productive rms without any assumptions about the character of relationship between productivity and growth. When decomposing TFP, on the other hand, the robustness to variations in the theory of production becomes important as the theory chosen will determine how TFP is computed. The most common theory of production is a CobbDouglas form taking labour, capital and materials as input (e.g. Disney et al. (2003); Foster et al. (2002, 1998)) but there are also alternatives (e.g. the frontier function approach used by Cantner and Kr uger (2008) or an index numbers
7 A common interpretation of TFP is as technological change. As argued by Lipsey and Carlaw (2004) there is a large number of factors causing TFP to be a biased measure of technological change. The authors argue that a better interpretation of changes in TFP is as an imperfect measure of the quasi rents associated with innovative activities. That is, as phrased by Syverson (2010), as changes in output when holding inputs constant. 8 Gross output is of course never negative but value added can be.

method as used by e.g. Scarpetta et al. (2002)). The choice of theory will imply a set of assumptions; often perfect substitutability of labour, capital and perhaps even inputs. The trick of measuring capital may be overcome by assuming that rms operate under perfect competition and with constant returns to scale. In this paper I will focus on labour productivity. The richness of the insight into the decomposition of productivity gained from Prices Equation would exceed the scope of a single paper were I to consider labour productivity and TFP in equal detail. Labour productivity suers from measurement problems as well. Studying any single factor productivity, labour productivity included, entails ignoring other factors. This is justiable when rms can be assumed to be similar along these other factors; in particular this means similar in their use of physical and human capital. Such an assumption has merit at a very disaggregate level when the rms being compared generate their principal shares of value added from similar production processes and thus have same industry classication codes. It should thus be expected that the lower the level of aggregation the stronger the role of the selection eect in the evolution of labour productivity.

3.1

Weights and populations

The considerations in this section have so far focussed on the choice of z , productivity, in the decomposition. But an equally important consideration pertains to the choice of x, the measure of rm size. In the earlier modelling eorts employing Prices Equation (e.g. Metcalfe and Ramlogan (2006); Metcalfe (1998)) a rms share (si ) of a population is often conceptualised at its market share and thus size is measured by output. In decomposition studies, however, it is more common to measure rm size by labour input. In the empirical analyses of the present paper populations will be delimited by industry codes and thus by production processes rather than by the goods produced. Using output weights would implicitly equate industries and product markets, which does not seem warranted. Using labour input for size in connection with populations delimited by industry codes has stronger merit the lower the level of aggregation. The more similar rms are with regards to their production processes, the more they can be expected to require qualitatively similar labour services. The various possible combinations of z and x means that population mean productivity, Z , will rarely be equal to aggregate productivity.9 . For this reason it is common to refer to the variable being decomposed as an index of productivity. I will refer to Z as population (mean) productivity. x will be measured by full-time equivalent employment (FTE), output as value added (VA) and thus z will be the logarithmic transformation of VA per FTE. This means that rms with negative or zero VA will be excluded from the analyses altogether. Furthermore, I will not consider populations of less than 20 rms. The availability of the data (described further in section 3.2) means that the rms used to decompose at the aggregate level can be decomposed into 39 two digit industries. These are listed in table A-1 page 23. The right hand column of the table lists short labels that will be used for reference to the
9 The one exception is the study by Andersson (2006), where size is measured as labour input and productivity is output per unit of labour input. I will decompose the evolution Output weighti valuei = weighti ln(valuei ) my decompositions and as ln of ln Labour input cannot be said to refer to aggregate productivity.

10

industries. At the two digit level 5 of the 39 industries have less than 20 rms and these are indicated by asterisks in table A-1.10 Thus the more disaggregate the level of analysis the fewer rms are included in the decompositions. Notice also how the meaning of entry and exit changes when moving to more disaggregate levels. Firms that are considered part of the C set at the most aggregate level may switch between industries and thus be the victim of subset selection in one industry and contribute novelty in the other.

3.2

Data material

The Company and Industry Statistics database11 of Statistics Denmark is employed in the empirical research of the following sections. The database contains various nancial data from the balance sheets and annual accounts of all private rms in Denmark as well as a number of estimated key indicators. The database is available for the years 1992 to 1999 (where the database was discontinued). Only three variables from the database are used here and only for the years 1992 and 1999. The variables are: value added (VA), full-time equivalent employment (FTE) and industry. VA in 1999 is deated to 1992 prices using the price index for the domestic supply of goods, which is obtained from the web page of Statistics Denmark (www.statistikbanken.dk).More disaggregate indexes for revenue in parts of the manufacturing sector are also available but will not be employed. What matters for competitive advantage is not the physical quantity of output but the real value of output. VA and FTE are not available for every rm in the database; in particular, there is no data for a number of service industries (utilities and a few entertainment industries such as theatre and radio/television) and the entire primary sector. The rms included do, however, represent a signicant share of economic activity in Denmark. The analyses of section 4.1 will compare correlations at various levels of aggregation but the data will be almost equally representative at the various levels. When studying the most aggregate level and thus not excluding any rm for belonging to small populations, the rms included in the analyses account for 89.2 percent of private sector employment in 1992 and 83.0 percent in 1999. The number of rms employed decreases whenever the investigation moves to a more disaggregate level. At the most disaggregate level used in section 4.1, the four digit level, the rms included account for 85.1 percent of private sector employment in 1992 and 78.9 percent in 1999. In section 4.2 all analyses will be based on the group of rms that can be aggregates into two digit industries of at least 20 rms. These rms account for 89.0 percent of total private sector employment in 1992 and 82.8 percent in 1999. As will be seen, the analyses of section 4.2 could alternatively have been performed at others level of aggregation and the two digit level may seem somewhat arbitrary. However, the main aim of this paper is to demonstrate and discuss decomposition analyses based on Prices Equation and for this purpose the relative ease of presenting an overview of the results by-industry at the two digit level outweighs theoretical considerations.
10 At the three digit level 58 of 159 industries are excluded and at the four digit level 170 of 348 are excluded. 11 Original Danish name: Firma- og Ressourceomr adestatistik.

11

3.3

The equations

The decomposition technique used will be equation 3 and it is repeated here as equation 5 for reference and to make the labelling of the various terms explicit. Z =
iC

si (zi Z ) s i zi
iC s i (zi Z ) iN

(Selection eect) (Learning eect) (5) (Entry eect) (Exit eect)

+ +
iX

si (zi Z )

Whenever results are presented the order of the eects will be as above. In section 4.2.3 I will exploit the recursive form of Prices Equation as expressed in equation 2 in order to perform a multilevel (here; two levels) decomposition of the evolution of labour productivity. Replacing the subscript is with subscript j s for industry the equation becomes: W Z = Cov (wj , zj ) + E (wj zj ) (6)

By adding subscript j s to equation 5 and substituting for zj in equation 6 the second term on the right may also be written as: E (wj zj ) =
j

sj wj
iCj

sij (zij zj ) +
iCj

s ij zij (7)

+
iNj

s ij (zij zj ) iXj

sij (zij zj )

And thus, substituting equation 7 into equation 6 and multiplying by W 1 , the equation used for the two level decomposition becomes (cf. the derivation of equation 3 page 6): Z =
j

sj (zj Z ) s j
j iCj

(Industry selection eect) (Firm selection eect) (Learning eect) (Entry eect) (Exit eect) (8)

+ +
j

sij (zij zj ) s ij zij

iCj s ij (zij zj ) iNj

s j s j
j

+
j

s j
iXj

sij (zij zj )

The rst term of this decomposition is the industry selection eect or the inter industry eect. It captures generative selection among industries and is not expected to contribute much to overall evolution i.e. cost advantages are

12

Table 2: Correlations of growth and productivity Measure of correlation Aggregation

All rms Av. 2-digit Av. 3-digit Av. 4-digit
wi =
Li,1999 Li,1992

corr(wi , zi )
0.060 0.119(0.133) 0.151(0.205) 0.164(0.248)

corr(wi , ln zi )
0.057 0.101(0.118) 0.138(0.193) 0.151(0.238)

(wi , zi )
0.225 0.236(0.077) 0.243(0.111) 0.250(0.133)

. zi =

Yi,1992 Li,1992

. =Spearman rank correlation. L is

FTE labour, Y is output (VA in 1992 DKK) and subscripts refer to years. Weighted sample standard deviations in parentheses. Source: own calculations.

not expected to be a major force in the evolution of industry structure. The second term is the rm selection eect or the inter rm intra industry eect. As with the selection eect in equation 5 it captures the generative selection among rms. The third eect is the learning or intra rm eect, which has the same interpretation and denition as what is elsewhere referred to as the innovation eect, and which was discussed earlier. The fourth and fth terms are the entry and exit eects respectively and while their interpretations are the same as above (bringer of novelty and subset selection) it must be kept in mind that some rms contribute dually to these eects: by leaving one industry and entering another they increase variety in the latter industry and decrease variety in the former.

Example results for labour productivity

In this section it will rst be studied whether selection is linear and thus captured by a covariance term, as assumed in both Prices Equation and similar decomposition techniques. It will secondly be demonstrated, through a number of examples based on Danish data, how Prices Equation can be used to create multilevel productivity analyses that takes into account redistribution of resources at multiple levels.

4.1

Is selection linear?

It was discussed in section 1 how both the inter rm eect of the popular technique for decomposing productivity growth and the selection eect of Prices Equation rely on there being a linear relationship between productivity and growth. The consequence of this assumption for studying the growth of labour productivity was discussed in section 3. To get a picture of the relationship between labour productivity and growth, various measures of correlation at various levels of aggregation have been computed and the results are presented in table 2. The table presents the correlations between productivity in 1992 and growth rate from 1992 to 1999 for all rms in the top row. The following three rows show the average correlations at the 2, 3 and 4 digit levels weighted by industry employment in 1992. In column two productivity is output per unit of labour 13

input and in column three this productivity is logged. Column four shows the rank correlation which is independent of whether or not the log transformation is applied. As mentioned in the presentation of the data in section 3.2 industries of less than 20 rms are excluded but this matters very little for the share of economic activity in Denmark included in the computations. The table clearly shows that the more disaggregated the level of computation, the stronger the correlation between labour productivity and employment growth from 1992 to 1999. This holds regardless of whether productivity is logtransformed or not and whether Pearsons or Spearmans correlation coecient is interpreted. This was to be expected. The more disaggregate the level of computation, the more meaningful it is to say that the rms making up a given industriy are in competition and that labour costs is a parameter for competing. It is worth noticing that the Pearson correlation coecient increases almost three fold when disaggregating from the top level down to four digit industries, while the Spearman correlation coecient only increases slightly though it is consistently a good deal higher than the Pearson coecient. This could indicate that there is a tendency for more productive rms to outgrow others but that the relationship is not linear.12 The Pearson correlation is slightly higher for the un-transformed productivity measure than for the transformed measure. However, this dierence is very small when also considering the standard deviation and the evidence in table 2 does thus not allow inferences to be made regarding the role of costs in competition. That is, whether competitive advantages should be measured by absolute or relative dierence in costs. The mean and standard deviations in table 2 gives an initial idea of the distributions of the correlations across industries but the full picture is obtained from the histograms in gure A-1, page 22.13 The histograms show clearly that while there are a number of industries with negative Pearson correlation there are very few industries with negative Spearman correlation; notice the dashed vertical reference line at zero. This again indicates that rms with higher productivity outgrow others but also that the relationship is more complicated than is captured by a linear relationship with or without the logarithmic transformation. Notice also how the distribution of Spearman correlations tends towards a unimodal, left skewed shape, especially at the three and four digit level, whereas the Pearson correlations seem to have fatter tails (higher kurtosis). Even though the linear relationship assumed in the decomposition techniques seems questionable, there still is, on average, a positive and non-negligible Pearson correlation between productivity and growth. And it must also be kept in
12 In order to investigate this further I also tried doing a number of OLS regressions with w i as the dependent variable and productivity and squared productivity as explanatory variables with and without the logarithmic-transformation. It is dicult to make any generalizations about the results. For some industries the slopes are not at all signicant while in others they are highly signicant. The slope of squared productivity is sometimes negative though mostly positive. The variation in the standard errors of the slope estimates across industries may have as much to do with the varying number of rms in the industries as with dierences in the relationship between productivity and growth. Even when both slopes are signicant it is often the case that R2 < 0.1 and in several instances even R2 < 0.01. The results are generally the same whether or not the log transformation is applied. This indicates that cost competition has very dierent roles across the industries and further development in this direction should probably start at studying the role of cost competition in specic industries. 13 The data in table 2 is weighted and thus do not describe the distributions pictured in gure A-1.

14

Table 3: Labour productivity in 1992 and 1999 Z

12.854

Z
13.004

Z
0.150

X
910,243

X
984,237

W
1.081

Source: own calculations.

mind that the decompositions do not take the correlations as a point of departure. Rather, the equations may be rewritten as a covariance in order to facilitate interpretation and the relatively low correlations do not imply that decomposition studies should be given up altogether. The following sections report the results of decomposition analyses at various levels of aggregation based on the log of labour productivity.

4.2

Decomposition analyses

In this section the evolution from 1992 to 1999 of Danish logarithmically transformed labour productivity will be decomposed with reference to three levels of aggregation. Z refers to population mean of productivity at the most aggregate level, zj is mean productivity at the two digit industry level and zij is the productivity of rm i in industry j . The top level of aggregation includes all rms for which data is available excluding those for which the corresponding two digit industry has less than 20 rms and those with negative value added, cf. section 3. Table 3 present an overview of labour productivity in Denmark in 1992 and 1999. The population mean productivity was 12.854 in 1992 corresponding to 382,314 DKK per FTE labour unit.14 Seven years later productivity had grown by 16 percent in real terms corresponding to an average growth rate of 2.2 percent per year.15 At the same time FTE employment rose by 8.1 percent from 910,243 to 984,237. In the following three subsection the evolution of the labour productivity index (i.e. the 0.150) will be decomposed. At rst aggregately; treating all rms as part of just one large population. Secondly, the decomposition will be undertaken on a by-industry basis at the two digit level highlighting the discreprencies across industries. And lastly the information from the by-industry decomposition will be used to do a multilevel decomposition of top level productivity evolution. 4.2.1 The evolution of labour productivity

The decomposition of the evolution of labour productivity according to equation 5 is shown in gure 1. The order of the eects is the same in gure 1 as in equation 5: the selection, learning, entry and lastly the exit eect. The lions share of evolution is attributed to intra rm change; or what has here been labelled the learning eect. This eect accounts for 51 percent of total evolution. The eect of rms entering the population is also quite large: the entry eect accounts for 23 percent of total change. Notice, however, that
14 e12.854 15 e0.150

= 382, 314 = 1.1618 and 7 1.1618 1 = 0.022

15

0.150 = 0.023 + 0.076 + 0.035 + 0.016

100% 15% 51% 23% 12%

Figure 1: Decomposition of the evolution of labour productivity some survivor bias may be expected, as rms that start up after 1992 but are closed down before 1999 cannot be included in the decomposition. The total contribution of the two eects argued to represent the creation of novelty is thus 74 percent of total productivity growth. The selection eect; the linear tendency for rms with higher levels of productivity to grow more than rms with low levels of productivity, accounts for 15 percent of total evolution, while the exit eect accounts for the remaining 12 percent. This makes the eects relatively minor in an accounting sense but the total eect of selection, the sum of generative and subset selection, accounts for slightly more than a fourth of total evolution. It is not often seen in the literature that the top level productivity is decomposed, as the validity of comparing rms based on labour productivity depends on the similarity of the activities of the rms. The decomposition of top level productivity here is undertaken for comparison with the more disaggregate decompositions that follow. 4.2.2 Two digit industries

In the following analysis industries will be denoted by j . The evolution of labour productivity (zj ) in 34 Danish two digit industries is reported in table A-2, which uses short labels to refer to the industries. The industries are dened in table A-1. Both tables are in the appendix. In table A-2 the selection, learning, entry and exit eects are reported as shares of numerical total evolution. The sum of the four eects will therefore be equal to 1 in industries with growing productivity and equal to 1 in industries with declining productivity. The rst thing to notice from table A-2 is that there are quite a number of negative eects. A negative entry (exit) eect means that rms entering (exiting) the population have lower (higher) than mean productivity and their entry (exit) thus contributes to lowering the mean. A negative learning eect means that intra rm change tends to decrease productivity and a negative selection eect means that the covariance between productivity in the base year and growth over the period is negative. It must be kept in mind that productivity is just one characteristic of the rms. In some industries there may be other factors that are more important for competition and thus for selection. It is also worth noticing that there is a tendency for the decomposition to return extreme results when the change being decomposed is very small. The most extreme case is the industry for manufacturing of radio and communications equipment (Comm.), where zj is equal to -0.018 corresponding to an average yearly percentage change in productivity of -0.26 percent. The result of decomposing this small change is that the learning as well as the entry eect has a magnitude of more than nine times the total change in productivity. No conclusion can be inferred from this extreme result but neither should one ex-

16

pect to learn much from decomposing productivity change when productivity does not change. Similarly, the decomposition tends to give good meaning and return eects in the ]0 , 1[ range whenever productivity growth is strong. Two such examples are the manufacturing industries of wearing apparel (Clothes) and leather and footwear (Leather), which have seen changes of 0.445 and 0.472 respectively but highly disparate underlying forces. In Clothes the change is to a large extent driven by the selection eect (43.2 percent) but notice also that the amount of labour input employed in the industry has been more than halved (wj = 0.46). This is consistent with low productivity rms downsizing and potentially o shoring production without closing down completely. Were the rms to terminate all activities or just enough to be reclassied in the industry classication system they would contribute to the exit eect instead. In Leather, on the other hand, productivity growth stems almost exclusively from change internal to the rms (the learning eect equals 80.2 percent of total change) and employment has only decreased slightly over these seven years. There are only a few industries in which the selection eect accounts for a large share of productivity growth relative to the top level decomposition of the previous section.16 Interestingly, a number of the industries with strong selection eects are service industries. The covariance of productivity and growth seems very strong in the human health and social services (Health) though this industry is arguably in the group of industries with low productivity change and thereby not a meaningful decomposition. A better example may be recreational, cultural and sporting activities (Recr.) where the selection eect accounts for 25.2 percent of a 0.334 change in mean productivity the largest productivity growth among the service industries. The decomposition of productivity growth at the two digit level has shown varying results. That the forces driving the evolution of productivity varies across industries is to be expected but it is most likely not possible to generalize much regarding the background of the variations in the primacy of the eects. What is needed is industry studies. Here, however, the analysis of evolution at the two digit level serves to give a sense of the dynamics underlying top level evolution. And in the following section it will be demonstrated how the dynamics at the two digit level can be taken into account when studying the evolution of mean productivity at the top level. 4.2.3 A multilevel decomposition

In this section it will be demonstrated how multilevel decomposition of productivity change can add detail to the interpretation of the selection eect in particular. It was argued that when decomposing top level mean productivity change (Z = 0.150, cf. table 3) the inter rm selection eect was not really meaningful as comparison of labour productivity across the entire Danish private sector has very little merit. The merit of the comparison increases with disaggregation and table A-2 showed how the decomposition of productivity change across the industries reveals some very heterogeneous dynamics. Figure 2 shows how the change en population mean productivity at the top level is decomposed using equation 8 and the information from table A-2. The eects in gure 2 are the industry selection, rm selection, learning,
16 Where

the selection eect accounted for 15 percent of total change.

17

0.150 = 0.001 + 0.019 + 0.074 + 0.039 + 0.017

100% 0% 13% 49% 26% 11%

Figure 2: Decomposition of the evolution of labour productivity entry and exit eects respectively. The inter industry selection eect is very small. Indeed, there was very little reason to expect a priori that the evolution of industry structure is governed by the mean labour productivity at the industry level. But separating out this eect means that the generative selection of rms is quantied at the appropriate level of aggregation. Here, this inter rm intra industry selection eect accounts for 13 percent of evolution, i.e. slightly less than was found when decomposing at the top level. The selection eect in gure 1 is potentially biased by industry idiosyncrasies. That is, by some industries expanding at the cost of others for reasons that are unrelated to productivity but nevertheless show up as a covariance between growth and productivity. By restricting the selection eect to comparison of rms at the two digit level such bias is controlled for. It is not just the selection eect that is close to identical in gures 1 and 2. So are the learning, entry and exit eects. Regarding the entry and exit eects this is a bit surprising. At the two digit level there is a lot of entries and exits that are not captured at the top level, as the rms in question are not new start-ups or close down but rather move between industries. This phenomenon could be included in the decomposition by dening multiple sets of entering and exiting rms according to future and past existence of the rms. However, this is left for future research. The motivation for restricting the inter rm selection eect to specic subpopulations is determined by theory and closely intertwined with the choice of productivity measure and the choice of size measure/weighting scheme. Here, the focus has been on demonstrating the multilevel decomposition technique and this lead to a denition of sub-populations at the two digit level. This results in a relatively low number of sub-populations and therefore has the appealing feature that an exhaustive overview of the complete set of sub-populations can be presented, as also mentioned in section 3.2. It was thus ignored that the correlation of productivity and growth was shown to increase with disaggregation in section 4.1.

Conclusions

Even though George Prices general mathematical theory of selection was originally formulated for biology it also carries important lessons for the eld of economics. It highlights the limitations and caveats to keep in mind when interpreting the inter rm selection eect and it inspires to rewriting the most common decomposition technique so that it becomes capable of taking into account possible multilevel population structures. In hindsight the multilevel property could also have been inferred from the traditional decomposition equations as long as the cross level eect is not separated from the intra rm innovation/learning eect. This, however, is not the norm. Prices methodology brings out the linearity assumption and the multilevel property for all to see.

18

Combining Prices selection mathematics on the one side with theorizing in evolutionary economics on generalized Darwinism and the population perspective on the other adds insight to the meaning of the terms in decomposition studies. It makes clear how the meaning of the selection eect is highly dependent on the chosen measure of productivity and the applied weighting scheme. Thus performing multiple decompositions employing dierent measure of productivity and dierent weighting schemes cannot be considered tests for robustness of the results. They should rather be seen as dierent analyses in their own right and varying decomposition results should be expected. The assumption of linear selection has been subjected to a preliminary analysis in this paper. It was shown that for labour productivity weighted by employment the linear relationship is simplistic. The result was found whether or not labour productivity was logarithmically transformed and at various levels of aggregation. But it cannot be surprising that the relationship between productivity and growth varies across industries and common decomposition techniques may yet be the best one-size-ts-all tools. This, however, also strongly implies that more could be learned about economics selection in industry specic studies. The demonstration of the application of multilevel decomposition served to highlight the possibilities of the technique but did not add much to empirical knowledge of the evolution of labour productivity. The inter industry selection eect was practically zero and the inter rm intra industry selection eect was largely the same as when the extra level was not taken into account. In this specic case, it could be argued that the multilevel decomposition is an unnecessary complication and that the simpler decomposition should be preferred on grounds of parsimony. But it is important to stress that the application here was chosen for ease of exposition: the data only allows for 34 industries at the two digit level and thus the results could be presented by industry as well. The multilevel equations will nd application in research projects with an explicit taxonomic side; e.g. studies that include taxonomies of labour quality and thus allow for grouping of rms according to their human capital prole. Other examples are studies that seek to study the tendency (at least in Denmark) for economics activity to be increasingly centred around larger cities. By including a spatial level in the decomposition it would be possible to include the eect of location on the reallocation of labour resources. The paper suggests a number of paths for further research. Experimenting with various delimitations of subpopulations is just one (grouping of rms by output rather than production processes would also be interesting). The demonstration of the technique presented here also uncovered an interesting facet of multilevel decomposition studies: rms may jump from one subpopulation to another. The role of this eect was not studied at all here. And most importantly: this paper has focussed on labour productivity but research is also need on the consequences of Prices insight for decomposition of TFP change.

References
Aldrich, H. E., Hodgson, G. M., Hull, D. L., Knudsen, T., Mokyr, J., and Vanberg, V. J. (2008). In defence of generalized Darwinism. Journal of Evolutionary Economics, 18(5):577596.

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Andersen, E. S. (2004). Population thinking, Prices equation and the analysis of economic evolution. Evolutionary and Institutional Economics Review, 1(1):127148. Andersson, L. F. (2006). F oretagsdynamik och Tilv axt. ITPS rapport A2006:016. Institut f or Tilv axtpolitiske Studier, Ostersund. Bartelsman, E. J., Bassanini, A., Haltiwanger, J., Jarmin, R. S., and Schank, T. (2004). The spread of ICT and productivity growth: Is Europe lagging behind in the New Economy? In Cohen, D., Garibaldi, P., and Scarpetta, S., editors, The ICT Revolution: Productivity Dierences and the Digital Divide. Oxford University Press, Oxford and New York. Bartelsman, E. J. and Doms, M. (2000). Understanding productivity growth: lessons from longitudinal microdata. Journal of Economic Literature, 38(3):569594. Bowles, S. (2004). Microeconomics: Behaviour, Institutions and Evolution. Princeton University Press, Princeton. Buenstorf, G. (2006). How useful is generalized Darwinism as a framework to study competition and industrial evolution? Journal of Evolutionary Economics, 16(5):511527. Cantner, U. and Kr uger, J. J. (2008). Micro-heterogeneity and aggregate productivity development in the German manufacturing sector. Journal of Evolutionary Economics, 18(2):119133. Disney, R., Haskel, J., and Heden, Y. (2003). Restructuring and productivity growth in UK manufacturing. The Economic Journal, 113(489):666694. Foster, L., Haltiwanger, J., and Krizan, C. J. (1998). Aggregate productivity growth: Lessons from microeconomic evidence. NBER Working Paper Series, 6803. Foster, L., Haltiwanger, J., and Krizan, C. J. (2002). The link between aggregate and micro productivity growth: Evidence from retail trade. NBER Working Paper Series, 9120. Frank, S. A. (1995). George Prices contribution to evolutionary genetics. Journal of Theoretical Biology, 175(3):373388. Hodgson, G. M. and Knudsen, T. (2006a). Dismantling Lamarckism: why descriptions of socio-economic evolution as Lamarckian are misleading. Journal of Evolutionary Economics, 16(4):343366. Hodgson, G. M. and Knudsen, T. (2006b). The nature and units of social selection. Journal of Evolutionary Economics, 16(5):477489. Knudsen, T. (2004). General selection theory and economic evolution: the Price equation and the replicator/interactor destinction. Journal of Economic Methodology, 11(2):147173.

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Lipsey, R. G. and Carlaw, K. I. (2004). Total factor productivity and the measurement of technological change. Canadian Journal of Economics, 37(4):11181150. Metcalfe, J. S. (1994). Competition, Fishers principle and increasing returns i the selection process. Journal of Evolutionary Economics, 4(4):327346. Metcalfe, J. S. (1998). Evolutionary Economics and Creative Destruction. Routledge, London and New York. Metcalfe, J. S. and Ramlogan, R. (2006). Creative destruction and the measurement of productivity change. Revue de lOFCE, 97(5):373397. Page, K. M. and Nowak, M. A. (2002). Unifying evolutionary dynamics. Journal of Theoretical Biology, 219(1):9398. Price, G. R. (1970). Selection and covariance. Nature, 227:520521. Price, G. R. (1995). The nature of selection. Journal of Theoretical Biology, 175(3):389396. Scarpetta, S., Hemmings, P., Tressel, T., and Woo, J. (2002). The role of policy and institutions for productivity and rm dynamics: Evidence from micro and industry data. OECD Economics Department Working Papers, 329. Syverson, C. (2010). What determines productivity? NBER Working Paper Series, 15712. van Veelen, M. (2005). On the use of the Price equation. Journal of Theoretical Biology, 237(4):412426. Winter, S. G. (1987). Natural selection and evolution. In Eatwell, J., Milgate, M., and Newman, P., editors, The New Palgrave: A Dictionary of Economics, volume 3, pages 614617. The Macmillan Press Limited, London and Basingstoke, 1st edition. Witt, U. (2003). The Evolving Economy. Edward Elgar, Cheltenham and Northampton. Zinovyeva, N. (2004). Multilevel population thinking: The history and the use of the concept in economics. DRUID Working Papers, 04-08.

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Two digit industries

Three digit industries

Four digit industries Left column: corr(wi , zi ), centre column: corr(wi , ln zi ) and right column: (wi , zi ). The vertical axis is 0 to 30 percent. and the horizontal axis is -1 to 1 with a dashed reference line at 0. Source: own calculations.

Figure A-1: The distribution of correlations across industries 22

Table A-1: Two digit populations Two digit classication 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Description

Manufacturing of . . . Food and beverages Tobacco* Textiles Wearing apparel Leather and footwear Wood and wood products Pulp, paper and paper products Printing and publishing Rened petroleum products* Chemicals Rubber and plastic products Other non-metallic mineral products Basic metals Metal products Machinery and equipment Electronic components* Other electric machinery and equipment Radio and communications equipment Medical and optical instruments Motor vehicles Other transport equipment Furniture and manufacturing n.e.c. Recycling* Services Food.Bev. Tobacco Text. Clothes Leather Wood Paper Publ. Oil Chemicals Rubber Mineral Metal M.Prod. Mach. Elect. O.elec. Comm. Med.Opt. Motor Transp. Furni. Recyc.

Label

45 50 51 52 55 60 61 62 63 70 71 72 74 85 92 93

Construction Sales and services of motor vehicles Wholesale Retail and repair shops Hotels and restaurants Land transport Water transport Air transport* Supporting transport activities Real estate activities Rental of transport equipment and machinery Computer and related activities Consultancy and cleaning activities Human health and social services Recreational, cultural and sporting activities Other service activities

Constr. Vehicl. Wholes. Retail Hotels L.trans. W.trans. A.trans. O.trans. R.estate Rental Computers Consul. Health Recr. Others

23

Table A-2: Evolution of labour productivity (zj ), 1992-1999 Industry Selection 0.029 0.277 0.432 0.090 0.210 2.339 0.143 0.027 0.300 0.187 0.775 0.184 0.093 2.043 1.602 0.044 0.176 0.102 0.260 Learning. 0.670 0.385 0.025 0.802 0.333 2.498 0.595 0.562 0.581 0.924 1.573 0.425 0.561 1.307 9.439 0.412 0.549 1.389 0.518 Entry 0.121 0.279 0.286 0.013 0.099 0.977 0.314 0.612 0.183 0.017 1.107 0.275 0.261 0.312 9.350 0.478 0.266 0.358 0.158 Exit 0.180 0.058 0.257 0.095 0.358 0.181 0.052 0.202 0.064 0.281 2.455 0.116 0.085 0.576 2.513 0.066 0.008 0.133 0.064 zj 0.175 0.159 0.445 0.472 0.135 0.015 0.264 0.259 0.148 0.141 0.047 0.166 0.174 0.036 0.018 0.406 0.226 0.128 0.241 wj 0.81 0.78 0.46 0.82 1.28 0.86 0.96 1.11 1.07 1.03 1.39 0.94 1.02 1.29 1.20 1.07 1.24 0.69 1.10

Manufacturing Food.Bev. Text. Clothes Leather Wood Paper Publ. Chemicals Rubber Mineral Metal M.Prod. Mach. O.elec. Comm. Med.Opt. Motor Transp. Furni.

Services Constr. Vehicl. Wholes. Retail Hotels L.trans. W.trans. O.trans. R.estate Rental Computers Consul. Health Recr. Others
Productivity is ln

0.159 0.166 0.220 0.051 0.060 0.227 0.512 0.083 0.232 0.115 0.266 0.060 1.084 0.252 0.371
Yi,1992 Li,1992

0.619 0.527 0.457 0.443 0.207 0.530 1.060 0.436 0.266 0.507 0.044 0.306 1.093 0.364 0.807

0.337 0.240 0.102 0.033 0.608 0.224 0.572 0.544 1.022 0.584 0.342 0.518 0.303 0.185 0.094

0.116 0.067 0.425 0.576 0.126 0.020 0.121 0.102 0.055 0.809 0.880 0.236 0.707 0.199 0.084

0.187 0.273 0.101 0.077 0.270 0.180 0.258 0.244 0.216 0.070 0.051 0.043 0.067 0.334 0.103

1.19 1.15 1.12 1.00 1.01 1.14 0.29 1.25 1.71 1.43 2.05 1.37 1.46 1.52 1.16

Eects are reported as shares of zj . zj is population mean productivity in industry j . Y is output (VA in 1992 DKK), L is FTE labour and subscripts refer to years. Source: own calculations.

24