Decomposing Productivity and Wage Effects of Intra-Establishment Labor Restructuring

Aggregate productivity growth can be decomposed into growth within establishments, between establishments, and the impact of entering and exiting establishments. We demonstrate that such a productivity decomposition formula can also be used for studying intra-establishment restructuring through the inflow and outflow of workers. There are, however, three requirements: Firstly, comprehensive longitudinal linked employer-employee data are needed. Secondly, now the productivity decomposition formula cannot be used for accounting but must be used as an estimation model. Thirdly, the decomposition formula should be such that a meaningful interpretation of its components is possible. The decomposition can also account for different worker types, e.g. age groups. We apply such a method to study the productivity growth and wage growth within the establishments of the Finnish business sector. The results provide empirical evidence on economic incentives for hiring young workers and separating older workers