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Nick Bloom, Econ 247, 2011
Nick Bloom
Productivity and Reallocation
Nick Bloom, Econ 247, 2011
Big Overview
Economists started looking at establishment data in the 1990s (Haltiwanger, Davis, Bartelsman, Bailey etc.)
There was surprise over:
• High levels of turnover
• Heterogeneity within industries
• The lumpiness of micro-economic activity
• The importance of reallocation in driving productivity
Nick Bloom, Econ 247, 2011
Why should you be interested in this?
First, this is important to understanding macroeconomic activity – e.g. 3/4 productivity growth is reallocation, unemployment driven by rates of churn
Second, this is a fertile area of research:• It is new – many open questions• It is hard – typically needs mix of empirics, simulation
and modeling, so barriers to entry high
Third, the NBER has a Census node. Census data is painful to access, but this also deters – so still low-hanging fruit (like my Grandma’s attic – some amazing stuff in there)
Nick Bloom, Econ 247, 2011
High levels of turnover
Heterogeneity within industries
The lumpiness of micro-economic activity
The importance of reallocation in driving productivity
Nick Bloom, Econ 247, 2011
Turnover
About 15% of jobs are destroyed and 20% created in the private sector every year. About 80% of this turnover occurs within the same SIC-4 digit industry
This is robust across countries (US, Europe, Asia and SA)
But, before I show data a couple of point on definitions:
• This is turnover in “jobs”, defined in terms of establishment employment changes, e.g. CES
• A linked (but distinct concept) is turnover in “employment” – which is two to three times higher – defined in terms of workers changes, e.g. CPS
Nick Bloom, Econ 247, 2011
Turnover in “Jobs” versus “Employment” – Expanding Firm example
Source: John Haltiwanger Note: Worker flow=14, Job flow=4
Nick Bloom, Econ 247, 2011Source: John Haltiwanger
Turnover in “Jobs” versus “Employment” – Contracting Firm example
Note: Worker flow=15, Job flow=9
Nick Bloom, Econ 247, 2011
Quarterly Job Flows in Private Sector, 1990-2005, BED data
Source: John Haltiwanger
(1) Net jobs flows equal change in employment ≈ change in unemployment(2) Gross flows are much bigger than net flows(3) Reduction in job churn that (in manufacturing) part of a longer trend(4) Job destruction does not necessarily mean firing – could be not hiring a replacement for a separation.
Nick Bloom, Econ 247, 2011
JOLTS monthly worker turnover data
Source: John Haltiwanger
Depth of post 9/11 recession: 1) Figures don’t add up (JOLTS is not good for
employment – CES survey more accurate)2) Still massive churn – including quits – in depths of
the recession (I quit a job in December 2001)
Nick Bloom, Econ 247, 2011
Job Flows and Employment Flows, total private
Source: John Haltiwanger
Nick Bloom, Econ 247, 2011
Much of the turnover is creation/destruction in same SIC4 industry
Source: John Haltiwanger, Changes defines as % over average base & end years
Excess reallocation = |job creation| + |job destruction| - |job creation-job destruction|
Nick Bloom, Econ 247, 2011
This is very much in the spirit of Schumpeter
Nick Bloom, Econ 247, 2011
This is very much in the spirit of Schumpeter
Although probably his most famous quote was:“Early in life I had three ambitions. I wanted to be the greatest economist in the world, the greatest horseman in Austria, and the best lover in Vienna. Well, I never became the greatest horseman in Austria“
To which the (un-attributed) response was:“Those we knew Schumpeter as an Economist, Lover or a Horseman presumed his skills were in the other two fields”
“The fundamental impulse that keeps the capital engine in motion comes from the new consumers’ goods, the new methods of production and transportation, the new markets... [The process] incessantly revolutionizes from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact of capitalism.”Schumpeter (p. 83, 1942)
Nick Bloom, Econ 247, 2011
High levels of turnover
Heterogeneity within industries
The lumpiness of micro-economic activity
The importance of reallocation in driving productivity
Nick Bloom, Econ 247, 2011
Heterogeneity basic facts
Typical gap between 10th and 90th percentiles of productivity within same industry is 200% (Syverson ,2004)
These spreads are very persistent:• About 70% to 80% annual job-flows are persistent• About 60% to 70% annual productivity growth is
persistent
Nick Bloom, Econ 247, 2011
What could cause this heterogeneity?
One possibility is pure measurement error, but:
• Productivity is strongly linked with exit and LR growth
• When looking at micro-industries where we measure plant prices (e.g. boxes, bread, block ice, concrete, plywood, etc.) still see this spread (Foster, Haltiwanger and Syverson, 2008 AER)
Nick Bloom, Econ 247, 2011
Explanations of this heterogeneity?
Several possible economic models of the spread are:
• Mistakes/learning (Jovanovic, 1982 Econometrica)
• Mis-measurement:• “Hard” technology (e.g. R&D)• Skills• Other inputs (computers) or utilization
• Management and managers
Nick Bloom, Econ 247, 2011
High levels of turnover
Heterogeneity within industries
The lumpiness of micro-economic activity
The importance of reallocation in driving productivity
Nick Bloom, Econ 247, 2011
Lumpiness of growth
The share of employment growth generated by large adjustments is big (Davis and Haltiwanger, 1992 QJE)
• More than 2/3 manufacturing job creation/destruction accounted for by +25% changes
• For non-manufacturing even greater
Same is true, but more extreme, for investment (Doms and Dunne, 1998 RED).
Suggests substantial adjustment-costs in factor changes
Nick Bloom, Econ 247, 2011
Lumpiness of employment growth
Source: John Haltiwanger, annual data manufacturing
Nick Bloom, Econ 247, 2011
High levels of turnover
Heterogeneity within industries
The lumpiness of micro-economic activity
The importance of reallocation in driving productivity
Nick Bloom, Econ 247, 2011
Measuring productivity (ωi,t)
Labor Productivity:
tititi lvaLP ,,,
Three factor TFP:
timtiktiltiti mklyTFP ,,,,3,
Five factor TFP:
tictietimtiktiltiti cemklyTFP ,,,,,,5,
Note: va=log(value added), l=log(labor force), k=log(tangible capital), m=log(materials, e=log(energy), c=log(IT). If IT included need to remove from tangible capital.
Nick Bloom, Econ 247, 2011
Defining industry (or aggregate) productivity
Define a simple industry productivity index: Pt
Where:
ωi,t is the productivity of establishment i in period t (i.e. log(labor productivity) or log (TFP))
si,t is the share of establishment i in the industry in period t (i.e. the share of employment or sales in industry employment or sales)
titit sP ,,
Nick Bloom, Econ 247, 2011
Industry productivity can increase through two channels
• Within Firms (Traditional view)– The same firms become more productive (e.g. new
technology spreads quickly to all firms, like Internet)
• Between Firms (“Schumpeterian”view)– Low TFP firms exit and resources are reallocated to
high TFP firms• High TFP firms expand (e.g. more jobs) & low TFP
firms contract (e.g. less jobs)• Exit/entry
24
Nick Bloom, Econ 247, 2011
These two effects are well known to cricket fans
Within batsman (each batsman improves)
Between batsman (more time for your best batsman)
25
Nick Bloom, Econ 247, 2011
Decomposing productivity (1)
Productivity growth for a balance panel of establishments can be broken down into three terms:
termCross ))((
rmBetween te )(
rm Within te)(
1,,1,,
1,1,,
1,,1,
1,1,,,1
titititi
tititi
tititi
tititititt
ss
ss
s
ssPP
Within term is included in representative agent models, while the between and cross terms would not be
Reallocation
Nick Bloom, Econ 247, 2011
Decomposing productivity (2)
Allowing for entry and exit requires two more terms:
Exit term )(
Entry term )(
termCross ))((
termBetween )(
termWithin )(
,,
,,
,
,
1,,1,,
1,1,,
1,,1,
1,1,,,1
AverageExitExitti
AverageEntryEntryti
titititi
tititi
tititi
tititititt
titi
titi
s
s
ss
ss
s
ssPP
This is the Bailey, Hulten and Campbell (1992) decomposition
Nick Bloom, Econ 247, 2011
*
Source: John Haltiwanger
Total reallocation (between, entry and exit) accounts for about ½ of manufacturing TFP growth
*Combines -0.08 “between” and 0.34 “cross”
Nick Bloom, Econ 247, 2011
(A) Treats all reallocation within establishments as “within” growth• Large establishments in balanced panel (500 employees)
(B) Reallocation terms most likely to be downward biased by miss measured prices (Foster, Haltiwanger and Syversson, 2008)
So in manufacturing re-allocation of factors probably accounts for the majority of productivity growth
This is probably even an underestimate
Nick Bloom, Econ 247, 2011
Source: Foster, Haltiwanger & Krizan (2000 and 2006)
Reallocation (including entry) accounts for almost all Retail TFP growth
0
0.2
0.4
0.6
0.8
1
Retail
ContinuingEstablishments
Net entry
Nick Bloom, Econ 247, 2011
Source: Hsieh and Klenow (2008); mean=1
Differences in reallocation also a factor in explaining cross country TFP gaps