Reallocation, Firm Dynamics, and Productivity Growth: Evidence from Eswatini’s Manufacturing Sector

Abstract

Abstract See mansucript PDF file for abstract with equation This article investigates the contributions of real productivity, firm-size rationalization, and net-entry effects to aggregate labour productivity (ALP) growth using a panel dataset from Eswatini’s manufacturing sector. It compares these results with what obtains in world economies at different stages of development. After controlling for extreme values, it found a persistent annual average increase of 2.67% in real productivity. The sector also experienced labour reallocation gains of 0.26% from incumbents and suffered losses of 0.43% from the entry/exit margins. Thus, within-firm effects dominated the intensive and extensive forms of labour input reallocation a fortiori. Further, cross-sectional distributions of up-to the fourth-order moment of labour shortages were used as sources of exogenous variation in endogenous aggregate employment growth when estimating the impact of the latter on reallocation. The first-order moment was strongly associated with changes in aggregate employment growth while higher-order moments had insignificant effects. In contrast, the reshuffling of labour among incumbents and across sectors was robustly unresponsive to variations in aggregate employment growth. However, a unit percentage point increase in aggregate employment growth from a Two Stage Least Squares (TSLS) estimator inversely varied with net-entry effects at the rate of β̂ 𝑇𝑆𝐿𝑆𝜖(-0.976, -0.926), depending on model specification. JEL Classification: J24, L6, O47.