Disentangling the firm growth process:evidence from a recursive panel VAR

We attempt to describe the coevolution of employment growth, sales growth andgrowth of profits in a panel of French manufacturing firms 1996-2004. Our analysisentails ‘recursive’ panel vector autoregressions, whereby we impose the structure of employmentgrowth leading to contemporaneous sales growth, which in turn is associatedwith contemporaneous growth of profits. We observe that whilst employment growthhas a direct negative association with profit growth, there are indirect effects throughwhich employment growth leads to sales growth which in turn has a large effect on profitsgrowth. The net effect of employment growth is thus positive growth of profits. Counterto some ‘replicator dynamics’ theories of industrial development, profit growth is notfollowed by much subsequent growth of employment...