This paper provides new facts on the nature of job reallocation over the business cycle, and addresses the question of whether reallocation causes recessions or recessions cause reallocation. Although we do not resolve the question of causality, two general findings emerge that advance our understanding of job reallocation and business cycles. First, much of the cyclical fluctuation in gross job flows occurs in larger plants with relatively moderate employment growth that tends to be transitory, especially at medium-term horizons (up to five years). Unusually large employment growth rates, especially plant startups and shutdowns, are primarily small-plant phenomena and tend to be permanent, less cyclical, and occur later in recessions. Further, high job flow rates occur primarily in plants previously experiencing sharp employment contractions or expansions. Second, key variables that should determine the allocation factors of production across plants and sectors do in fact appear to be related to gross job flows, particularly job destruction. Relative prices, productivity, and investment exhibit time series correlations with job reallocation that suggest that allocative driving forces may contribute significantly to business cycle fluctuations.
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The Missing Link: Technology, Productivity, and Investment
October 1995
Working Paper Number:
CES-95-12
This paper examines the relationship between productivity, investment, and age for over 14,000 plants in the U.S. manufacturing sector in the 1972-1988 period. Productivity patterns vary significantly due to plant heterogeneity. Productivity first increases and then decreases with respect to plant age, and size and industry are systematically correlated with productivity and productivity growth. However, there is virtually no observable relationship between investment and productivity or productivity growth. Overall, the results indicate that plant heterogeneity and fixed effects are more important determinants of observable productivity patterns than sunk costs or capital reallocation. Key Words: productivity, investment, technical change
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The Trend to Smaller Producers in Manufacturing in Canada and the U.S.
March 2002
Working Paper Number:
CES-02-06
This paper examines the trend in the importance of small producers in the Canadian and U.S. manufacturing sectors from the early 1970s to the late 1990s in order to investigate whether there was a common North American trend in changes in plant size. It finds that small plants in both countries increased their share of employment up to the 1990s, but their share remained stable in the 1990s. Small plants increased their share of output up to the 1990s, but then saw their share of output decline. Over the entire time period, their share of output increased less than their share of employment and, therefore, their relative labour productivity has fallen. The similarity in the trends in the two countries suggests that causes of this phenomenon should be sought in similarities such as the technological environment rather than in country-specific factors like unionization or trade intensities.
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Explaining Cyclical Movements in Employment: Creative-Destruction or Changes in Utilization?
November 2006
Working Paper Number:
CES-06-25
An important step in understanding why employment fluctuates cyclically is determining the relative importance of cyclical movements in permanent and temporary plant-level employment changes. If movements in permanent employment changes are important, then recessions are times when the destruction of job specific capital picks up and/or investment in new job capital slows. If movements in temporary employment changes are important, then employment fluctuations are related to the temporary movement of workers across activities (e.g. from work to home production or search and back again) as the relative costs/benefits of these activities change. I estimate that in the manufacturing sector temporary employment changes account for approximately 60 percent of the change in employment growth over the cycle. However, if permanent employment changes create and destroy more capital than temporary employment changes, then their economic consequences would be relatively greater. The correlation between gross permanent employment changes and capital intensity across industries supports the hypothesis that permanent employment changes do create and destroy more capital than temporary employment changes.
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Gross Job Flows and Firms
November 1999
Working Paper Number:
CES-99-16
This paper extends the work of Dunne, Roberts, and Samuelson (3) and Davis, Haltiwanger, and Schuh (2) on gross job flows among manufacturing plants. Gross job creation, destruction, and reallocation have been shown to be important in understanding the birth, growth, and death of plants, and the relation of plant life cycles to the business cycle. However, little is known about job flows between firms or how job flows among plants occur within firms (corporate restructuring). We use information on company organization from the Longitudinal Research database (LRD) to investigate the relationship between plant-level and firm-level job flows. We document: (1) the fraction of plant-level gross job flows occurring between firms; and (2) gross job flows by the extent of excess job reallocation occurring in firms.
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Technology and Jobs: Secular Changes and Cyclical Dynamics
September 1996
Working Paper Number:
CES-96-07
In this paper, we exploit plant-level data for U.S. manufacturing for the 1970s and 1980s to explore the connections between changes in technology and the structure of employment and wages. We focus on the nonproduction labor share (measured alternatively by employment and wages) as the variable of interest. Our main findings are summarized as follows: (i) aggregate changes in the nonproduction labor share at annual and longer frequencies are dominated by within plant changes; (ii) the distribution of annual within plant changes exhibits a spike at zero, tremendous heterogeneity and fat left and right tails; (iii) within plant secular changes are concentrated in recessions; and (iv) while observable indicators of changes in technology account for a significant fraction of the secular increase in the average nonproduction labor share, unobservable factors account for most of the secular increase, most of the cyclical variation and most of the cross sectional heterogeneity.
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Why Are Plant Deaths Countercyclical: Reallocation Timing or Fragility?
November 2006
Working Paper Number:
CES-06-24
Because plant deaths destroy specific capital with large local economic impacts and potentially important macroeconmic effects, understanding the causes of deaths and, in particular, why they are concentrated in cyclical downturns, is important. The reallocationtiming hypothesis posits that plants suffering adverse permanent demand/productivity shocks delay shutdowns until cyclical downturns when plant capacity is less valuable, while the fragility hypothesis posits that shutdowns occur in downturns because the option value of maintaining the plant through low profitability periods is too small. I show that the effect that a plant's specific capital has on the timing of plant deaths differs across these two hypotheses and then use this insight to test the hypotheses' relative importance. I find that fragility is the dominant cause of the countercyclical behavior of plant deaths. This suggests that the endogenous destruction of capital is likely an important amplification and propagation mechanism for cyclical shocks and that stabilization policies have the benefit of reduced capital destruction.
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Linking Investment Spikes and Productivity Growth: U.S. Food Manufacturing Industry
October 2008
Working Paper Number:
CES-08-36
We investigate the relationship between productivity growth and investment spikes using Census Bureau's plant-level data set for the U.S. food manufacturing industry. We find that productivity growth increases after investment spikes suggesting an efficiency gain or plants' learning effect. However, efficiency and the learning period associated with investment spikes differ among plants' productivity quartile ranks implying the differences in the plants' investment types such as expansionary, replacement or retooling. We find evidence of both convex and non-convex types of adjustment costs where lumpy plant-level investments suggest the possibility of non-convex adjustment costs and hazard estimation results suggest the possibility of convex adjustment costs. The downward sloping hazard can be due to the unobserved heterogeneity across plants such as plants' idiosyncratic obsolescence caused by different R&D capabilities and implies the existence of convex adjustment costs. Food plants frequently invest during their first few years of operation and high productivity plants postpone investing due to high fixed costs.
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A Comparison of Job Creation and Job Destruction in Canada and the United States
May 1994
Working Paper Number:
CES-94-02
In recent years a growing number of countries have constructed data series on job creation and job destruction using establishment-level data sets. This paper provides a description and detailed comparison of these new data series for the United States and Canada. First, the Canadian and United States industry-level job creation and destruction data are remarkably similar. Industries with high (low) job creation in the US are evidenced by high (low) job creation in Canada. The same is true for job destruction. In addition, the overall magnitude of gross job flows in the two countries is comparable. Second, the time-series patterns of creation and destruction are qualitatively similar but do differ in a number of important respects. In both countries, job destruction is much more cyclically volatile than job creation. This cyclical asymmetry is, however, more pronounced in the United States. The paper finishes with a characterization of the job flow patterns using a modified Blanchard and Diamond (1992) model.
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Estimating Capital Efficiency Schedules Within Production Functions
May 1992
Working Paper Number:
CES-92-04
The appropriate method for aggregating capital goods across vintages to produce a single capital stock measure has long been a contentious issue, and the literature covering this topic is quite extensive. This paper presents a methodology that estimates efficiency schedules within a production function, allowing the data to reveal how the efficiency of capital goods evolve as they age. Specifically we insert a parameterized investment stream into the position of a capital variable in a production function, and then estimate the parameters of the production function simultaneously with the parameters of the investment stream. Plant level panel data for a select group of steel plants employing a common technology are used to estimate the model. Our primary finding is that when using a simple Cobb Douglas production function, the estimated efficiency schedules appear to follow a geometric pattern, which is consistent with the estimates of economic depreciation of Hulten and Wykoff (1981). Results from more flexible functional forms produced much less precise and unreliable estimates.
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Productivity Adjustments and Learning-by-Doing as Human Capital
November 1997
Working Paper Number:
CES-97-17
This paper measures plant-level productivity gains associated with learning curves across the entire manufacturing sector. We measure these gains at plant startups and also after major employment changes. We find: 1.) The gains are strongly associated with a variety of human capital measures implying that learning-by-doing is largely a firm-specific human capital investment. 2.) This implicit investment is large; many plants invest as much in learning-by-doing as they invest in physical capital and much more than they invest in formal job training. 3.) This investment differs persistently over industries and is higher with greater R&D. 4.) Consistent with a learning-by-doing interpretation, the human capital investment is much larger following employment decreases than increases. We conclude that learning-by-doing is a major factor in wage determination, technical progress and asymmetric employment adjustment costs.
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