Distribution of Labor Productivity: Advanced small- and medium-sized firms

We shed light on the current status of small- and medium-sized (SMS) firms in Japan by studying their distribution of labor productivity on the basis of exhaustive financial data on one million firms. In fact, the labor productivity shows significant variance in disagreement with the prediction of the neoclassical theory. Here, we distinguish between SMS and large firms by the numbers of employees. The functional shape of the distribution of labor productivity enables us to extract SMS firms with high productivity from the main body in a simultaneous way; those advanced firms are very few, though. It is thereby an oversimplified idea that SMS firms are always of low productivity. We then find that the emergence of innovation in the non-manufacturing industry is quite different from that in the manufacturing industry. Technological revolutions take place with similar probability irrespective of business sectors in the manufacturing industry. On the other hand, three of the major sectors that should have led the Japanese economy,—construction, wholesale trade, and retail trade—seriously suffer from their low probability for innovation. Finally, we hope the present analysis contributes to the formulation of sound policies for the recovery of the Japanese economy.