Do recessions raise productivity?

In the Telegraph, Roger Bootle writes:

It actually needs a downturn to flush out the inefficient companies and thereby to release resources - people, machines, property and management - to permit the creation of new companies.
Accordingly, far from fluctuations being necessarily bad, they have some characteristics that improve the allocation of resources and act to increase the sustainable growth rate of the economy.

This is certainly theoretically possible. But is it true? Here’s some scraps of contrary evidence:
1. The proportion of plants that close in any given year doesn’t change much in recession or booms. This suggests recession doesn’t winnow out inefficient firms. Instead, recessions might raise productivity by stopping unproductive firms from entering an industry or growing.
2. Geroski and Gregg’s study of the 1990s recession found that it was very difficult to predict which firms would suffer badly in recession. This suggests that measurably (perhaps an important qualifier) inefficient firms don’t necessarily shrink in recession. And they found only weak evidence that firms effectively restructured in recessions.
3. This paper by Alex Coad suggests that, on average, there’s very little correlation between firm efficiency and firm growth. Which suggests that resources don’t flow from inefficient, shrinking firms to efficient growing ones.
4. This paper (pdf) by Antonio Fatas concludes that “Countries with more volatile fluctuations display lower long-term growth rates.”
Now, I’m being deliberately selective here; in my book, I give a more balanced picture. And some research (pdf) by Keith Blackburn shows that economic volatility can raise average growth. Suffice only to say that the evidence is mixed. There’s a long gap between theoretical possibility and established empirical fact.
FWIW, I suspect the effect of recession on productivity growth depends upon what causes recession. If recession is the result of a simple exogenous drop in demand, productivity might improve, as the firms that suffer most could be those that are worst at attracting customers.
However, if recession is due to a credit squeeze, it could hurt productivity, as potentially efficient but temporarily cash-constrained firms suffer, whilst inefficient but cash-generative monopolies are less affected.

Comments

[Dipper]

as I gaze upwards from my lowly seat in the City, it certainly seems to be the case that booms allow inefficient organisations (or parts of organisations) to drive out efficient ones.

[Charlieman]

CD: "And they found only weak evidence that firms effectively restructured in recessions."

Is there evidence that shows that firms effectively restructure during booms?

[David]

When I look at employment sites, I see 100 and 150K jobs posted -

www.linkedin.com
www.indeed.com
www.realmatch.com

So why are all these jobs posted and I have a good job and all I know have a good job and still people claim unemployment?

[reason]

Why was productivity growth so high in the relatively stable 60s? And consider that overworked employees may actively look for productivity improvements in order to reduce the strain they are under, while workers who feel threatened by redundancy may find ways to deliberately reduce productivity so as to make themselves less expendable. I think it is a bit like running - there is not much evidence that running fast has much to do with height - and there is not much evidence that the business cycle has much to do with productivity.

[reason]

David - come back in 18 months and say that. Unemployment is a trailing indicator.

[reason]

Famous last words of idiots.

[reason]

David really is perfect evidence that the world is unfair. How can such an idiot have a job!

[reason]

I know - maybe it was satire of course!

[reason]

But it is true I guess, that after recessions, start ups have it easier, not only are workers easier to recruit and motivate but IN PARTICULAR rents are lower. This may not do much for average productivity (since startups are mostly crap) but it may seed some important new innovations. I wonder how you would check out that theory?

[Planeshift]

"So why are all these jobs posted and I have a good job and all I know have a good job and still people claim unemployment?"

Because most of them are work from home scams, sales positions in firms with high turnover of staff so permantly advertised, or real positions requiring skilled experienced people for the job - in other words aimed at pinching people already in work but looking to move.