Structural change decomposition of productivity without share weights

Abstract

Structural change is important driver of productivity. Existing decompositions of structural change rely heavily on the share weights of firms. Ideally, one would need a complete census of all firms to calculate the share weights. However, empirical data are often less than ideal. Another limitation of the structural change decompositions is that existing firms that switch from one industry to another are mixed with startups and bankrupt firms. To address both these limitations, we develop an alternative productivity decomposition of structural change that avoids the use of share weights, which can be useful whenever the share weights are problematic or unavailable. Our decomposition also takes the product switch explicitly into account and applies to both the level and percentage change of productivity. Application to Finnish agriculture illustrates the proposed approach.