presentation: globalization and economic volatility2011/10/04 · graft and corruption even...
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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
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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
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Productivity Distribution Within Narrowly Defined Industries
Interquartile Range of TFP is 30 log points
Productivity of Businesses
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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)
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ProbOfOfExit(firm) Distorted Economy
Healthy EconomyHealthy Economy
Firm Productivity
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Firm Employment Changes
Job CreationJob Destruction
Firm Productivity Shock(P fit bilit )
Range of Inaction
(Profitability)
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JobCreationCreation
Healthy EconomyDistorted, UncertainEconomy
Firm Productivity ShockRange of inaction (increases with uncertainty and distortions)
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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
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HYPOTHETICAL EFFECT OF HYPOTHETICAL EFFECT OF TRADE REFORMTRADE REFORMTRADE REFORMTRADE REFORM
P( it) 1
Trade reform
P(exit)=1
reform
TFPQ
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EFFECTIVE TARIFFS IN COLOMBIAEFFECTIVE TARIFFS IN COLOMBIA
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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)
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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]
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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)
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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
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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.
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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
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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
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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)
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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
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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)
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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
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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