Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

The U.S. Establishment-Size Distribution: Secular Changes and Sectoral Decomposition

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

The U.S. Establishment-Size Distribution: Secular Changes and Sectoral Decomposition

Article excerpt

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Establishment heterogeneity has been modeled in economics at least since the seminal work of Lucas (1978). More recently, this feature has been incorporated into calibrated models to provide quantitative evaluations of different mechanisms. This article aims to contribute to this literature by providing a set of facts about the establishment-size distribution since the 1970s that may be used to calibrate and test the predictions of these models.

First, this article analyzes establishment data from 1974-2006.1 During this period, the number of workers (size) of a "representative establishment" is relatively constant. Next, the analysis turns to the dispersion of establishment sizes. The size distribution of establishments has become slightly more even. The same analysis is then applied at the sector level. Service establishments became larger and service labor became more concentrated in large establishments while opposite trends were observed in manufactures. Although these intrasector shifts played an important role in explaining aggregate movements, intersector changes were also found to be important. Finally, this article considers whether trends in the firm-size distribution resemble those found in establishments. They are similar, although labor became slightly more concentrated in large firms.

Davis and Haltiwanger (1989) also analyze secular trends at the establishment level.2 In particular, they study changes in the establishment-size distribution during the period 1962-1985. First, they study how workers are distributed across establishments; they find that the "representative" worker was working in a larger establishment in 1962 than in 1985. Second, they consider the establishment-size distribution; conversely, they find that the "representative" establishment was smaller in 1962 than in 1985.3 The opposite behavior of these series reveals a decline in the dispersion of establishment size. Davis and Haltiwanger also decompose these changes by sector. They find that "changes in the industry distribution of employment and movements in the employee size distribution within the average two-digit industry make roughly equal contributions to the secular shift towards mid-size establishments in the aggregate economy." This article extends part of their work through 2006 and complements it with an analysis of firm data and alternative statistics, figures, and decompositions. The earlier change in the first moments contrasts with the finding in this article, while the downward trend in the dispersion of establishment size continued after 1985.

Buera and Kaboski (2008) also study the evolution of the scale of production and sectoral reallocation. They emphasize the difference between the size distribution for manufactures and services establishments. Additionally, they present evidence of the rise in the size of service establishments and the reallocation of resources from manufacturing to services.4 Our article extends their analysis by studying changes in the size distribution of manufacturing and service establishments over time.

Several studies take an interest in which distribution best fits the firmsize distribution. Gibrat (1931) finds that the log-normal distribution effectively described French industrial firms. This distribution is a consequence of the "law of proportional effect," also known as Gibrat's Law, whereby firm growth is treated as a random process and growth rates are independent of firm size (Sutton 1997). As noticed by Axtell (2001), census data display monotonically increasing numbers of progressively smaller firms, a shape the log-normal distribution cannot reproduce. Using data from the U.S. Census Bureau from 1988-1997, Axtell (2001) shows that firm size is approximately Zipf-distributed. Although we find that the aggregate distribution is relatively stable, results for manufacturing and services suggest that it would be interesting to extend Axtell's analysis to the sectoral level. …

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