Worker Quality, Matching and Productivity Slowdown

Abstract: Measured aggregate productivity and the income share of top earners are strongly and positively correlated in the Canadian data. Productivity slowdown since the early 2000s was accompanied with a flattening income share of top earners. Motivated by these facts, we study the role of firms' top-paid workers and worker matching in accounting for the slowdown of measured total factor productivity. We first estimate total factor productivity for Canadian firms in the period of 2003-2015, taking into account the assortative matching between top workers and non-top workers. Measured total factor productivity consists of the Hicks-neutral technology and the quality of top workers. Our estimation suggests that measured aggregate total factor productivity declined from 2003 to 2015, in line with that estimated by the statistical agency. The decline of measured productivity is entirely accounted for by the declining quality of top workers, while the Hicks-neutral technology improved. Both the within-firm changes and the cross-firm reallocation of top-worker quality are important in contributing to the decline of overall top-worker quality. We also discuss possible causes of declines in the quality of top workers, e.g., the emigration of top talents as studied in recent literature.