Globalization and Economic Globalization and Economic VolatilityVolatility

October 2011 October 2011 By John By John HaltiwangerHaltiwanger

University of Maryland and NBERUniversity of Maryland and NBER

OverviewOverviewFocus on Firm Level VolatilityFocus on Firm Level Volatility

Idiosyncratic Risk is an Order of Magnitude Larger than Idiosyncratic Risk is an Order of Magnitude Larger than Aggregate Risk for Firms and PersonsAggregate Risk for Firms and PersonsAggregate Risk for Firms and PersonsAggregate Risk for Firms and PersonsFirm volatility is an important source of idiosyncratic riskFirm volatility is an important source of idiosyncratic risk

The economic success of a country at the The economic success of a country at the yyAGGREGATE level depends in large part how AGGREGATE level depends in large part how well it manages idiosyncratic risk and associated well it manages idiosyncratic risk and associated firm level volatilityfirm level volatilityKey challengesKey challenges::

AllocativeAllocative efficiency requires restructuring and efficiency requires restructuring and reallocation. reallocation.

Globalization is a key driving forceGlobalization is a key driving forceRestructuring and Reallocation are costlyRestructuring and Reallocation are costly

Productivity Distribution Within Narrowly Defined Industries

Interquartile Range of TFP is 30 log points

Productivity of Businesses

More than 5200 country/industry/year observations of some of the keymoments virt all all sho high dispersion in both STD(LPR) and STD(TFPR)

1.25

moments -- virtually all show high dispersion in both STD(LPR) and STD(TFPR)

0.75

1

PR

0.5Std

TFP

0

0.25

0.25 0.5 0.75 1 1.25

Std LPR

444

Share of Establishments by Firm Size, 2005

Large Firms (500+ employees),employees),

1,030,481

Micro Firms (1-9 employees),

3,956,622

Small-Medium (10-500 employees),

1,669,297

Share of Employment by Firm Size, 2005

Micro Firms (1-9 employees),employees), 13,332,034

Large Firms (500+ employees), 56,374,911

Small-Medium (10-500 employees),

46 147 89446,147,894

Distribution of firms by size(ratio of the mean size of fourth to the first quartile of thedistribution of firms)

Total Total High & medium techCountry

Total economy

Total manufacturing

High & medium tech industries

Finland 15 37 46France 52 77

weighted average 1

Italy 32 66 111Netherlands 32 113 192Portugal 34 60 78United Kingdom 133 221United States 76 236 381United States 76 236 381

Argentina 29 47 52Brazil 65 74 117Estonia 35 56 85L i 51 47 44Latvia 51 47 44Mexico 51 108 277Romania 114 433Slovenia 126 283 314

Chile 2 16 15Colombia 2 25 24Venezuela 3 39 29

77

1. Weighted averages of industry-level data.2. Firms with 10 or more employees.3. Firms with 15 or more employees and sample of smaller units.

U.S. Labor Productivity: Comparison Between Actual and Random Allocation of Size ofActual and Random Allocation of Size of

Businesses

100

120

60

80

40

60

0

20

Actual Random Allocation

Covariance Between Size and 

0.60

Productivity (within industries)

0.40

0.50

0.20

0.30

0.00

0.10

‐0.10

0 25

0.30 Change in Covariance (within industries)

0.20

0.25

0.15

0.10

0.00

0.05

Job Creation and Destruction, U.S. Private Sector, Annual Rates (Percent of Employment),1980‐2009

Total =16.9

T l 15 3

Source: BDS

10 6

ContinuingEstablishments Continuing 

Establishments

Total=15.3

10.6

10

Establishments

New Establishments(ExistingFirms) ExitingEstablishments

3.1 2.9

3.22.4

New Firms

g g(Continuing Firms)

Exiting Firms

Job Creation Job Destruction

0.2Up or Out Dynamics of Young U.S. Firms

0.15

0.1

0.05

0

Firm Age

Net Employment Growth (Continuing Firms) Job Destruction from Exit

1

90th and 10th Percentiles of Net Employment Growth Rates for Surviving  U.S. Private Sector Firms by Firm Age (2003‐05)

0.8

0.4

0.6

0.2

‐0.2

0

1 2 3 4 5 6 to 10 11 to 15 16+

‐0.6

‐0.4

0.6Firm Age Class

10th Percentile 90th Percentile

Industry as Predictor of Size and Industry as Predictor of Size and Growth of Firms?Growth of Firms?Growth of Firms?Growth of Firms?

R-squared from 6-digit NAICS effects

Probability Firm has less than 20 employees

0.12

Net Firm Growth Rate (All Firms) 0.06

Net Firm Growth Rate (Small Firms) 0 06Net Firm Growth Rate (Small Firms) 0.06

Probability firm is a high growth firm (defined as Net Rate> 2)

0.04(defined as Net_Rate>.2)

Probability firm is a high growth firm (defined as: Net Rate > 2 and Net Level

0.03(defined as: Net_Rate > .2 and Net_Level> 10 )

Sample: All U.S. Private Sector Firms, 2003-05

 Components of Total Factor Productivity Growth over  Five‐Year Horizons,  1977‐1997, Selected Manufacturing 

Industries

Total Within Reallocation Among Existing Establishments Net Entry

5.13

3.44

1 35

0.35

1.35

Total Within Reallocation Among Existing Establishments

Net Entry

Productivity of Young Businesses Relative to Mature Surviving Incumbents, U.S. Retail Trade

2.80%1 20%

3%5%

1.20%

Young Exits Mature Exits Young Survivors Young Survivors Five Years LaterYears Later

31 60%

-26.20% -27%

-31.60% -32%

Single Unit Establishment Firms All establishments

Much Scope for MisallocationMuch Scope for MisallocationMuch Scope for MisallocationMuch Scope for MisallocationBarriers to entry and exitBarriers to entry and exityyPoorly functioning product, capital and Poorly functioning product, capital and labourlabour marketsmarketslabourlabour marketsmarketsWeak rules of lawWeak rules of lawP bli i f t t fP bli i f t t fPoor public infrastructure for Poor public infrastructure for communication and transportationcommunication and transportationGraft and corruption Graft and corruption Even wellEven well--intended policies that deter job intended policies that deter job jjdestruction (and in turn job creation)destruction (and in turn job creation)

ProbOfOfExit(firm) Distorted Economy

Healthy EconomyHealthy Economy

Firm Productivity

Firm Employment Changes

Job CreationJob Destruction

Firm Productivity Shock(P fit bilit )

Range of Inaction

(Profitability)

JobCreationCreation

Healthy EconomyDistorted, UncertainEconomy

Firm Productivity ShockRange of inaction (increases with uncertainty and distortions)

What about Globalization?What about Globalization?What about Globalization?What about Globalization?

Trade liberalization has the potential toTrade liberalization has the potential toTrade liberalization has the potential to Trade liberalization has the potential to improve improve allocativeallocative efficiencyefficiency

MelitzMelitz (2003): Improves market competition(2003): Improves market competitionMelitzMelitz (2003): Improves market competition (2003): Improves market competition and permits more productive businesses to and permits more productive businesses to expand and improved market selectionexpand and improved market selectionp pp pPavcnikPavcnik (2002): Improves within plant (2002): Improves within plant productivity growth of surviving plants and productivity growth of surviving plants and p y g g pp y g g pallocativeallocative efficiencyefficiency

No free lunch:No free lunch:Restructuring and reallocation is disruptiveRestructuring and reallocation is disruptive

HYPOTHETICAL EFFECT OF HYPOTHETICAL EFFECT OF TRADE REFORMTRADE REFORMTRADE REFORMTRADE REFORM

P( it) 1

Trade reform

P(exit)=1

reform

TFPQ

EFFECTIVE TARIFFS IN COLOMBIAEFFECTIVE TARIFFS IN COLOMBIA

MARGINAL EFFECTS ON EXITMARGINAL EFFECTS ON EXIT

Regressor Pre-reform tariffs Post reform Differencelevels tariffs levels Difference

TFPQ (t-1) -0.0160***

(0.0015)-0.0221***(0.0026)

0 .0061***(0.0024)( ) ( ) ( )

Energy Prices (t-1) 0.0009(0.0021)0.0042

(0.0033)-0.0033(0.0027)

Materials Prices (t-1) 0.0195***

(0.0025)0.0326***(0.0044)

-0.0131***(0.0038)

Demand Shock (t-1) -0.0227***(0.0007)

-0.0271***(0.0013)

0.0043***(0.0011)

0 0137 0 0267 -0 0130Demand Elasticity (t-1) 0.0137(0.0513)0.0267

(0.0439)0.0130

(0.0098)

TABLE 7: AVERAGE TFP WITH EXITS TABLE 7: AVERAGE TFP WITH EXITS AS PREDICTED BY MODELAS PREDICTED BY MODELAS PREDICTED BY MODELAS PREDICTED BY MODEL

All Plants 1985 Incumbentscu be s

SampleActual Tariffs 1984 Tariffs Difference Difference

1986-19911.127 1.1247 0.0022 0.0025

(0.8021) (0.8023) [0.30] [0.30]

1992-19981.1403 1.1195 0.0207** 0.0256**

(0.9507) (0.9518) [2.15] [2.05]

1986-19981.133 1.1223 0.0106* 0.0113

(0 8722) (0 8743) [1 78] [1 60](0.8722) (0.8743) [1.78] [1.60]

Olley-Pakes Decomposition for Colombian ManufacturingManufacturing

1 70

1.80

0 90

1.00

1 40

1.50

1.60

1.70

0 60

0.70

0.80

0.90

1.20

1.30

1.40

0.40

0.50

0.60

0.90

1.00

1.10

0.10

0.20

0.30

0.8082 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Year

0.00

Aggregate (Weighted) Simple Average Cross-term

Source: Eslava et al. (2005)

 Olley Pakes Decomposition of Labor Productivity

(Average Industry)( g y)

4.500 000.02

China

3.80

4.15

ight

ed

-0 06-0.04-0.020.00

3 10

3.45

all,

Unw

eiav

erag

e

-0.12-0.10-0.080.06

OP

_gap

2.75

3.10

Ove

ra

-0.18-0.16-0.14

2.401998 1999 2000 2001 2002 2003 2004 2005

Year

-0.20

Year

Unweighted Average Overall OP_gap

No Free LunchNo Free LunchNo Free LunchNo Free Lunch

Restructuring and Reallocation is CostlyRestructuring and Reallocation is CostlyRestructuring and Reallocation is CostlyRestructuring and Reallocation is CostlyEven in U.S. displacement is a costly eventEven in U.S. displacement is a costly eventIn current crisis displacement is especiallyIn current crisis displacement is especiallyIn current crisis, displacement is especially In current crisis, displacement is especially costlycostly

In Colombia evidence shows it is not soIn Colombia evidence shows it is not soIn Colombia, evidence shows it is not so In Colombia, evidence shows it is not so much being in a sector with trade reform much being in a sector with trade reform that matters directly but being subject to athat matters directly but being subject to athat matters directly but being subject to a that matters directly but being subject to a bankruptcy layoff that is disruptive.bankruptcy layoff that is disruptive.

Back to Colombia…market reforms (including trade Back to Colombia…market reforms (including trade reforms) led to more plant exit and thus displacementreforms) led to more plant exit and thus displacementreforms) led to more plant exit…and thus displacementreforms) led to more plant exit…and thus displacement

EFFECTS ON WAGES AND EFFECTS ON WAGES AND EMPLOYMENTEMPLOYMENT

Table 2: Effects of Trade Liberalization and Bankruptcy on Wages and Employment

(1) (2) (3) (4) (5) (6)Effective tariffs in current job 0 0024*** 0 0025*** 0 0021***0 0021*** 0 0000 0 0004

Wages Formal Employment Tenure

Effective tariffs in current job 0.0024 0.0025 0.0021 0.0021 0.0000 0.0004(0.0008) (0.0008) (0.0006) (0.0006) (0.0037) (0.0037)

Bankruptcy layoff -0.0362*** -0.0012 -0.0197** -0.0234 -0.1460*** -0.0514(0.0114) (0.0239) (0.0087) (0.0183) (0.0541) (0.1133)

Effective tariffs x Bankruptcy layoff -0.0021* 0.0002 -0.0056(0.0012) (0.0010) (0.0059)

R² 0.37 0.37 0.17 0.17 0.12 0.12N 32,762 32,762 32,743 32,743 32,872 32,872

*** p

The Impact of Job Displacement on Earnings (Men, 3 years of tenure, 50 employee firms with contraction of 30% over 2 years)

Source: Davis and von Wachter (2011)

Unemployment Inflows and OutflowsUnemployment Inflows and Outflows

3.5

4.0

0 75

0.80

0.85MA(3) of CPS Unemployment Escape RateCPS Unemployment Inflow Rate

3.00.65

0.70

0.75

2.0

2.5

0.50

0.55

0.60

1.5

0.35

0.40

0.45

0.5

1.0

0 20

0.25

0.30

0.00.15

0.20

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Hiring and Job creation Lowest in last Hiring and Job creation Lowest in last 20 years20 yearsyy

17.0

18.0

10.0

11.0 Percent of Employment

15.0

16.0

8.0

9.0

13.0

14.0

6.0

7.0

11.0

12.0

4.0

5.0

Job Creation (left axis)

10.03.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Hires (right axis)

 T d i G Fl d N J b C i

Surprising (?) declining volatility in U.S. – what is the role of globalization?

Trends in Gross Flows and Net Job CreationAvg 1980‐1989 Avg 1990‐1999 Avg 2000‐2009

18.2

16.216.7

14.815.8

14.9

3.5

2.03.0

1.92.6

0.9

Gross Job Creation Job Creation (Startups) Gross Job Destruction Net Job Growth

Policy Challenges?Policy Challenges?Policy Challenges?Policy Challenges?Flexibility of Jobs and Workers are critical in advanced Flexibility of Jobs and Workers are critical in advanced yyAND emerging economies for productivity growthAND emerging economies for productivity growthStifling job and worker reallocation through job and Stifling job and worker reallocation through job and worker mobility restrictions dampens productivity levelsworker mobility restrictions dampens productivity levelsworker mobility restrictions dampens productivity levels worker mobility restrictions dampens productivity levels and growthand growthBUT workers caught up in this turbulence even in U.S. BUT workers caught up in this turbulence even in U.S. can experience persistent periods of joblessness andcan experience persistent periods of joblessness andcan experience persistent periods of joblessness and can experience persistent periods of joblessness and earnings losses.earnings losses.Implement safety net without moral hazard and adverse Implement safety net without moral hazard and adverse

l ti bl ith t d i j b d kl ti bl ith t d i j b d kselection problems, without dampening job and worker selection problems, without dampening job and worker mobility but provides support to those caught up in mobility but provides support to those caught up in restructuring.restructuring.Targeting problematic given heterogeneityTargeting problematic given heterogeneity