Recessions and total factor productivity: Evidence from sectoral data

Econ Model. 2021 Jan:94:130-138. doi: 10.1016/j.econmod.2020.09.025. Epub 2020 Oct 7.


The recent COVID-19 crisis has generated a concern that productivity (which was already at historically low levels) may further decline. From a theoretical standpoint, the recessions-total factor productivity (TFP) nexus is ambiguous à priori. This paper empirically examines the dynamic impact of recessions on TFP. We compute a new measure of utilization-adjusted productivity from a sample of 24 industries in 18 advanced economies between 1970 and 2014. Resorting to the local projection method we trace out the dynamic short to medium-term impact of such recessionary shocks. We find that deep recessions lead to a permanent deterioration in the level of total factor productivity. This effect is driven by the increase in resource misallocation across different sectors.

Keywords: Impulse response functions; Local projection; Productivity; Reallocation effects; Recessions; Sector-level data.