Productivity-enhancing reallocation during the Great Recession: evidence from Lithuania

Abstract This article studies the impact of the Great Recession on the relationship between reallocation and productivity dynamics in Lithuania. Using detailed micro-level data, we first document the aggregate contribution of firm dynamics and employment reallocation to productivity growth. Next, we estimate firm-level regressions to confirm the findings and to perform a heterogeneity analysis. The analysis shows that productivity shielded firms from exit, and that this relationship became stronger during the Great Recession. Moreover, we demonstrate that more productive firms experienced on average lower employment losses, especially during the economic slump. Taken together, our results suggest that reallocation was productivity-enhancing during the Great Recession. However, the analysis also indicates that the intensity varied with the sector’s dependence on external financing or international trade as well as market concentration.