Using plant-level data, I show that the dispersion of total factor productivity levels in U.S. manufacturing is greater in recessions than in booms. This phenomenon is particularly pronounced in durables and primarily reflects a higher share of relatively unproductive firms in a recession. The increased dispersion and left-skewness of productivity in a recession is characteristic of both incumbent plants and entering or exiting plants, suggesting that the productivity dynamics are not solely driven by compositional changes. I construct a business cycle model where production requires overhead inputs. In a boom, when overhead inputs are more expensive, only more productive firms enter and only more productive incumbents survive, which results in a more compressed productivity distribution. The model endogenously delivers pro-cyclical aggregate total factor productivity, entry, employment and a counter-cyclical relative price of durables.

Link to the paper: http://goo.gl/0O47RO

Link to the speaker’s webpage: https://sites.google.com/site/matthiaskehrig/