MACRO TOPICS Nick Bloom Heterogeneity and Reallocation

Nick Bloom, Macro Topics, Spring 2009

MACRO TOPICS

Nick Bloom

Heterogeneity and Reallocation


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


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, “micro to macro” 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


High levels of turnover

Heterogeneity within industries

The lumpiness of micro-economic activity

The importance of reallocation in driving productivity


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


Turnover in “Jobs” versus “Employment” – Expanding Firm example

Source: John Haltiwanger Note: Worker flow=14, Job flow=4

Nick Bloom, Macro Topics, Spring 2009Source: John Haltiwanger

Turnover in “Jobs” versus “Employment” – Contracting Firm example

Note: Worker flow=15, Job flow=9


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.


JOLTS monthly worker turnover data


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)


Job Flows and Employment Flows, total private



This is very much in the spirit of Schumpeter

A job-market tip from Schumpeter: the gentleman's handkerchief - very much in fashion right now…


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)


Heterogeneity basic facts

Within industries: Only about 10% of cross-establishment spread in output, employment, capital and productivity growth is explained by SIC 4-digit controls

Large: Typical gap between 10th and 90th percentiles of productivity within same 4-digit SIC industry is 50%

Persistent:• About 70% to 80% annual job-flows are persistent• About 60% to 70% annual productivity growth is

persistent


What could cause this heterogeneity?

One possibility is pure measurement error, but:• Productivity is strongly linked with exit and growth• Spreads are persistent & inter-linked across measures

Several possible economic models of the spread are:• Learning (e.g. Jovanovic, 1982 Econometrica)• Uncertainty and adjustment costs (Dixit and Pindyck, 1994

book; Abel and Eberly 1996 REStud)• Omitted factors - knowledge, vintages, skills etc…• Or even management (eg Bloom & Van Reenen, 2007 QJE)

Still a very active literature trying to explain micro productivity,with only about 10%-20% of variation explained.


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


Lumpiness of employment growth

Source: John Haltiwanger, annual data manufacturing


Re-allocation

Recent studies highlight role of reallocation for productivity growth in market economies:

• Large pace of output and input reallocation

• This is productivity enhancing (market forces)

• But, the magnitude depends somewhat upon sector, country and period


Defining 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 ,,


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.


Decomposing productivity (1)

Productivity growth for a balance panel of establishments can be broken down into three terms:

termCross ))((

termBetween )(

termWithin )(

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


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


*


Total reallocation (between, entry and exit) accounts for about ½ of manufacturing TFP growth

*Combines -0.08 “between” and 0.34 “cross”


(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


Source: Foster, Haltiwanger & Krizan (2000 and 2006)

Reallocation (including entry) accounts for almost all Retail TFP growth

00.10.20.30.40.50.60.70.80.9

1

Manufacturing Retail

ContinuingEstablishments

Net entry


Massive amounts of micro-heterogeneity – does this effect macrooutcomes:

• Consensus on employment is yes• i.e. Shimer and Hall

• My view on productivity is yes:• Most aggregate TFP growth not “within”, but not much

literature (Cabellero, Engel & Mico, 2006, Bloom, 2007)

• Debate on impact adjustment costs:• Caballero, Engel, Thomas, Veracierto... – another class

Conclusions


BIBLIOGRAPHYMain sources:Foster, Haltiwanger and Krizan (2000), “Aggregate productivity growth: lessons

from microeconomic evidence”

Also see:Davis and Haltiwanger (1992), “Gross Job Creation, Gross Job Destruction, and

Employment Reallocation”, QJE, 107(3), pp. 819-63. Foster, Haltiwanger and Krizan (2006), “Market selection, reallocation and

restructuring in US retail”, RESTAT

MACRO TOPICS Nick Bloom Heterogeneity and Reallocation

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