1. Firm-Level Shocks and Labor Flows
Mikael Carlsson, PhD1; Julián Messina, PhD2; Oskar Nordström-Skans, PhD3
1Uppsala University, UCLS and Sveriges Riksbank, 2Inter-American Development Bank and Institute for the Study of Labor (IZA) , 3Uppsala University, IFAU, UCLS and IZA.
Introduction
Benefits of the Empirical Approach
Motivation: What are the drivers of worker reallocation?
One out of three workers separated or hired annually
More than half due to excess turnover of workers
80+ % of reallocation takes place between firms in the same 3-digit industry (Sweden, US)
Little is known about how job and worker flows respond to structural firm-level shocks
Idiosyncratic demand, technology and factor price shocks are primary suspects
What this paper does
Analyzes employment adjustment (hires and separations) when firms are hit by shocks that alter their positions in the performance distribution.
Identifies 2 idiosyncratic shocks highlighted by Foster, Haltiwanger, & Syverson (2008):
Empirical challenge: need to handle that firm-level prices are idiosyncratic (and a function of the shocks)
Questions addressed:
Does it matter the origin of the shock for worker reallocation?
Is the reallocation process different depending on the size and sign of the shock?
Is it different in the short and long run?
Is it different if the shock is temporary vs. permanent?
Technology shocks
Shifting the firm-level physical production function The ability to produce at a given level of inputs.
Demand shocks
Shifting the firm level demand curve The ability to sell at a given price.
Data and Estimation of the Shocks
Model
Results
Firms’ physical production functions (TFPQ)
Firms’ product demand functions
Shocks and the Hiring rate
Shocks and the Separation rate
Separation rate
Hiring rate
Technology (s.d.)
Demand (s.d.)
Technology (s.d.)
Demand (s.d.)
Note: Each line represents the sum of the average hiring or separation rate among firms that do not adjust employment and the responses in percentage units as a (non-linear) function of an x sd of technology and demand shocks. Shaded areas depict 95 percent confidence intervals
White noise idiosyncratic technology shocks
Permanent demand shocks have much larger impact than technology on labor adjustments:
Dynamics of labor adjustments are fairly limited  Impact is mostly within a year
Transitory demand shocks have a much more muted impact than permanent shocks
Robustness: Results are very robust to varying assumptions about returns to scale, different demand elasticities, allowing for sectoral heterogeneity in the estimation of TFPQ, sample selection, alternative treatments for the dynamics of adjustment, and accounting for firm exit.
Labor adjustments in response to shifts in product demand curve are fast and symmetric:
Almost as much adjustment through separations as through hires
Firms would be able to adjust a lot downwards reducing hires, but do not use that margin
Firms primarily adjust through separations if shocks – and through hires if shocks are +
White noise idiosyncratic demand shocks
Table 1. The Core Structural VAR Equations
(1)
(2)
(3)
Variable:
Measured in data as:
Model Expression:
Long-run restrictions:
Solow =
WNULC
WND
Solow is the physical Solow residual (TFPQ)
WNULC is wage-neutral unit labor cost
WND is wage neutral demand
Conclusions
Labor adjustments are related to changes in firm-level performance. But the nature of the shocks matter.
We find substantial (re-)allocation towards firms with (permanently) higher product demand.
Rigidities do not appear to hamper adjustments relative to permanent demand shocks, but may limit substantially adjustment to temporary shocks
In the long run  Restrictions are sufficient to identify a VAR model using SVAR techniques.
Contact
References
Julián Messina
Inter-American Development bank
Website:
Carlsson, M, J. Messina and O. Nordström-Skans (2016) “Wage Adjustment and Productivity Shocks”, Economic Journal: 126(595):
Eslava, M., J. Haltiwanger, A. Kugler, and M. Kugler (2004): “The Effects of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia,” Journal of Development Economics, 75,
Davis, S. J., J. C. Haltiwanger, and S. Schuh (1996): Job Creation and Job Destruction. MIT Press, MA.
Foster, L., J. Haltiwanger, and C. Syverson (2008): “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?,” American Economic Review, 98(1),
Foster, L., J. Haltiwanger, and C. Syverson (2016): “The Slow Growth of New Plants: Learning and Demand,”Economica, 83(329),