Creative Destruction over the Business Cycle: A Stochastic Frontier Analysis

Abstract

This paper examines the within-industry distributions of jobs created and destructed across plants in terms of technical efficiency, technical efficiency change, scale effect, and technical change. It further investigates how these distributions vary with economic activity. By applying the stochastic frontier analysis to plant-level longitudinal data on Taiwan’s 23 two-digit manufacturing industries spanning the period 1992–2003, we find that jobs created (destructed) are disproportionately clustered at plants with lower technical efficiency but higher rate of technical change. A fall in economic activities is associated with a statistically significant decrease (increase) in the fraction of newly created (destructed) jobs accounted for by plants with a higher rate of technical change, indicating that creative destruction is more pronounced during economic contractions.