The Middle Productivity Trap: Dynamics of Productivity Dispersion
Dany Bahar
Key Findings
- Productivity growth follows a U-shaped pattern: both very low and very high productivity firms grow fastest, while middle-productivity firms grow slowest
- The inflection point where growth starts increasing is at the 98th percentile—only firms at the very top of the distribution experience divergent growth
- The U-shaped pattern is most pronounced in knowledge-intensive industries, suggesting difficulties in knowledge diffusion explain the results
- These dynamics can explain both rising within-industry productivity dispersion and the increasing market share of highly productive 'superstar' firms
About This Research
Why has productivity growth slowed across advanced economies since 2004? This paper documents a previously undiscovered stylized fact that may help explain both the productivity slowdown and rising within-industry productivity dispersion: a 'U-shaped' relationship between productivity growth and initial productivity levels, where fast growth is concentrated at both ends of the distribution.
Using a worldwide firm-level panel of nearly 4 million firms across 127 countries from 2006-2014, I find that highly unproductive firms grow fast (presumably by adopting 'low-hanging fruit' improvements), and highly productive frontier firms also grow fast (by innovating). But firms in the middle—the vast majority—grow slowest. This creates a 'middle productivity trap' where most firms cannot catch up to the frontier, generating increasing productivity dispersion over time.
Critically, I find this pattern is driven by knowledge-intensive industries, where the diffusion of innovations from frontier firms to the rest is presumably more costly. This suggests the documented dynamics reflect difficulties in knowledge diffusion: while frontier firms continue innovating and appropriating returns, these innovations don't trickle down to laggard firms due to market frictions. The process could partly explain both rising productivity dispersion and the increasing market share of 'superstar' firms.