Using a unique database that covers the entire U.S. manufacturing sector from 1976 until 1999, we estimate plant-level total factor productivity for a large number of plants. We characterize time series properties of plant-level idiosyncratic shocks to productivity, taking into account aggregate manufacturing-sector shocks and industry-level shocks. Plant-level heterogeneity and shocks are a key determinant of the cross-sectional variations in output. We compare the persistence and volatility of the idiosyncratic plant-level shocks to those of aggregate productivity shocks estimated from aggregate data. We find that the persistence of plant level shocks is surprisingly low-we estimate an average autocorrelation of the plantspecific productivity shock of only 0.37 to 0.41 on an annual basis. Finally, we find that estimates of the persistence of productivity shocks from aggregate data have a large upward bias. Estimates of the persistence of productivity shocks in the same data aggregated to the industry level produce autocorrelation estimates ranging from 0.80 to 0.91 on an annual basis. The results are robust to the inclusion of various measures of lumpiness in investment and job flows, different weighting methods, and different measures of the plants' capital stocks.
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Entry, Exit, and Plant-Level Dynamics over the Business Cycle
June 2008
Working Paper Number:
CES-08-17
This paper analyzes the implications of plant-level dynamics over the business cycle. We first document basic patterns of entry and exit of U.S. manufacturing plants, in terms of employment and productivity, between 1972 and 1997. We show how entry and exit patterns vary during the business cycle, and that the cyclical pattern of entry is very different from the cyclical pattern of exit. Second, we build a general equilibrium model of plant entry, exit, and employment and compare its predictions to the data. In our model, plants enter and exit endogenously, and the size and productivity of entering and exiting plants are also determined endogenously. Finally, we explore the policy implications of the model. Imposing a firing tax that is constant over time can destabilize the economy by causing fluctuations in the entry rate. Entry subsidies are found to be effective in stabilizing the entry rate and output.
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Misallocation or Mismeasurement?
February 2020
Working Paper Number:
CES-20-07
The ratio of revenue to inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation which hinders aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error. Our method exploits how revenue growth is less sensitive to input growth when a plant's average products are overstated by measurement error. For Indian manufacturing from 1985'2013, our correction lowers potential gains from reallocation by 20%. For the U.S. the effect is even more dramatic, reducing potential gains by 60% and eliminating 2/3 of a severe downward trend in allocative efficiency over 1978'2013.
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Exporting and Productivity: The Importance of Reallocation
June 2001
Working Paper Number:
CES-01-02
Exporting is often touted as a way to increase economic growth. This paper examines whether exporting has played any role in increasing productivity growth in U.S. manufacturing. While exporting plants have substantially higher productivity levels, there is no evidence that exporting increases plant productivity growth rates. However, within the same industry, exporters do grow faster than non-exporters in terms of both shipments and employment. Exporting is associated with the reallocation of resources from less ecient to more ecient plants. In the aggregate, these reallocation eects are quite large, making up over 40% of total factor productivity growth in the manufacturing sector. Half of this reallocation to more productive plants occurs within industries and the direction of the reallocation is towards exporting plants. The positive contribution of exporters also shows up in import-competing industries and non-tradable sectors.
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Are We Undercounting Reallocation's Contribution to Growth?
January 2013
Working Paper Number:
CES-13-55R
There has been a strong surge in aggregate productivity growth in India since 1990, following
significant economic reforms. Three recent studies have used two distinct methodologies to decompose the sources of growth, and all conclude that it has been driven by within-plant increases in technical efficiency and not between-plant reallocation of inputs. Given the nature of the reforms, where many barriers to input reallocation were removed, this finding has surprised researchers and been dubbed 'India's Mysterious Manufacturing Miracle.' In this paper, we show that the methodologies used may artificially understate the extent of reallocation. One approach, using growth in value added, counts all reallocation growth arising from the movement of intermediate inputs as technical efficiency growth. The second approach, using the Olley-Pakes decomposition, uses estimates of plant-level total factor productivity (TFP) as a proxy for the marginal product of inputs. However, in equilibrium, TFP and the marginal product of inputs are unrelated. Using microdata on manufacturing from five countries ' India, the U.S., Chile, Colombia, and Slovenia ' we show that both approaches significantly understate the true
role of reallocation in economic growth. In particular, reallocation of materials is responsible for over half of aggregate Indian manufacturing productivity growth since 2000, substantially larger than either the contribution of primary inputs or the change in the covariance of productivity and size.
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Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application
January 2010
Working Paper Number:
CES-10-02
This paper studies capital adjustment at the establishment level. Our goal is to characterize capital adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accumulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in each period. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. In doing so, we create a method to take into account censored observations stemming from intermittent investment. This methodology allows us to take the structural model directly to the data, avoiding time-consuming simulation based methods. To study the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.
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IT and Beyond: The Contribution of Heterogenous Capital to Productivity
December 2004
Working Paper Number:
CES-04-20
This paper explores the relationship between capital composition and productivity using a unique and remarkably detailed data set on firm-level, asset-specific investment in the U.S. Using cross-sectional and longitudinal regressions, I find that among all types of capital, only computers, communications equipment, software, and office building are associated (positively) with current and subsequent years' multifactor productivity. The link between offices and productivity, however, is shown to be due to the correlation between the use of offices and organizational capital. In contrast, the link between ICT equipment and productivity is robust to a number of controls and appears to be part causal effect and part reflection of the correlation between ICT and firm fixed (or slow-moving) effects. The implied marginal products by capital type are derived and compared to official data on rental prices; substantial differences exist for a number of key capital types. Lastly, I provide evidence of complementaries and substitutabilities among capital types ' a rejection of the common assumption of perfect substitutability ' and between particular capital types and labor.
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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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Multi-Product Firms and Product Switching
August 2008
Working Paper Number:
CES-08-24
This paper examines the frequency, pervasiveness and determinants of product switching by U.S. manufacturing firms. We find that one-half of firms alter their mix of five-digit SIC products every five years, that product switching is correlated with both firm- and firm-product attributes, and that product adding and dropping induce large changes in firm scope. The behavior we observe is consistent with a natural generalization of existing theories of industry dynamics that incorporates endogenous product selection within firms. Our findings suggest that product switching contributes to a reallocation of resources within firms towards their most efficient use.
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Collaborative Micro-productivity Project: Establishment-Level Productivity Dataset, 1972-2020
December 2023
Working Paper Number:
CES-23-65
We describe the process for building the Collaborative Micro-productivity Project (CMP) microdata and calculating establishment-level productivity numbers. The documentation is for version 7 and the data cover the years 1972-2020. These data have been used in numerous research papers and are used to create the experimental public-use data product Dispersion Statistics on Productivity (DiSP).
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Beyond Cobb-Douglas: Estimation of a CES Production Function with Factor Augmenting Technology
February 2011
Working Paper Number:
CES-11-05
Both the recent literature on production function identification and a considerable body of other empirical work on firm expansion assume a Cobb-Douglas production function. Under this assumption, all technical differences are Hicks neutral. I provide evidence from US manufacturing plants against Cobb-Douglas and present an alternative production function that better fits the data. A Cobb Douglas production function has two empirical implications that I show do not hold in the data: a constant cost share of capital and strong comovement in labor productivity and capital productivity (revenue per unit of capital). Within four digit industries, differences in cost shares of capital are persistent over time. Both the capital share and labor productivity increase with revenue, but capital productivity does not. A CES production function with labor augmenting differences and an elasticity of substitution between labor and capital less than one can account for these facts. To identify the labor capital elasticity, I use variation in wages across local labor markets. Since the capital cost to labor cost ratio falls with local area wages, I strongly reject Cobb-Douglas: capital and labor are complements. Now productivity differences are no longer neutral, which has implications on how productivity affects firms' decisions to expand or contract. Non neutral technical improvements will result in higher stocks of capital but not necessarily more hiring of labor. Specifying the correct form of the production function is more generally important for empirical work, as I demonstrate by applying my methodology to address questions of misallocation of capital.
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