Firm’s Response to Technology: Evidence from Compustat 1971-2000

Firm’s Response to Technology: Evidence from Compustat 1971-2000

Using the firm-level TFP and employment data constructed from the Compustat for 1971-2000, we estimate the technology’s effect on employment at the firm-level. In contrast to a recent literature that finds a contractionary effect of technology, firms create more jobs when productivity improves. More importantly, firm-level data reveal the propagation mechanism that aggregate data cannot. We find that firms react vastly differently to aggregate TFP. Even when the productivity improves economy wide so that many business firms expand, a large number of firms cut back on their employment as well as production at the same time. This is consistent with Schumpeter’s vision of creative destruction: innovation often destroys the value of established companies. Our analysis shows a difficulty of hypothesizing a representative firm s behavior from aggregate responses.