-
Going Entrepreneurial? IPOs and New Firm Creation
January 2017
Working Paper Number:
CES-17-18
Using matched employee-employer US Census data, we examine the effect of a successful initial public offering (IPO) on employee departures to startups. Accounting for the endogeneity of a firm's choice to go public, we find strong evidence that going public induces employees to leave for start-ups. Moreover, we document that the increase in turnover following an IPO is driven by employees departing to start-ups; we find no change in the rate of employee departures for established firms. We present evidence that, following an IPO, many employees who received stock grants experience a positive shock to their wealth which allows them to better tolerate the risks associated with joining a startup or to obtain funding. Our results suggest that the recent declines in IPO activity and new firm creation in the US may be causally linked. The recent decline in IPOs means fewer workers may move to startups, decreasing overall new firm creation in the economy.
View Full
Paper PDF
-
How Destructive is Innovation?
January 2017
Working Paper Number:
CES-17-04
Entrants and incumbents can create new products and displace the products of competitors. Incumbents can also improve their existing products. How much of aggregate productivity growth occurs through each of these channels? Using data from the U.S. Longitudinal Business Database on all non-farm private businesses from 1976'1986 and 2003'2013, we arrive at three main conclusions: First, most growth appears to come from incumbents. We infer this from the modest employment share of entering firms (defined as those less than 5 years old). Second, most growth seems to occur through improvements of existing varieties rather than creation of brand new varieties. Third, own-product improvements by incumbents appear to be more important than creative destruction. We infer this because the distribution of job creation and destruction has thinner tails than implied by a model with a dominant role for creative destruction.
View Full
Paper PDF
-
How Does Labor Market Size Affect Firm Capital Structure? Evidence from Large Plant Openings
November 2015
Working Paper Number:
CES-15-38
I examine how the labor market in which firms operate affects their capital structure decisions. Using the US Census Bureau data, I exploit a large plant opening as an abrupt increase in the size of a local labor market. I find that a new plant opening leads to a 2.6% to 3.9% increase in the debt-to-capital ratio of existing firms in the 'winner' county relative to the 'runner-up' choice. This result is consistent with larger labor markets making a job loss less costly, which in turn reduces indirect costs of financial distress. Moreover, this spillover effect is larger for firms 1) that have a larger fraction of employees in the affected county, 2) that employ the same type of workers as the new plant, and 3) that have larger unexploited benefits of debt.
View Full
Paper PDF
-
Modeling Endogenous Mobility in Wage Determiniation
June 2015
Working Paper Number:
CES-15-18
We evaluate the bias from endogenous job mobility in fixed-effects estimates of worker- and
firm-specific earnings heterogeneity using longitudinally linked employer-employee data from the LEHD infrastructure file system of the U.S. Census Bureau. First, we propose two new residual diagnostic tests of the assumption that mobility is exogenous to unmodeled determinants of earnings. Both tests reject exogenous mobility. We relax the exogenous mobility assumptions by modeling the evolution of the matched data as an evolving bipartite graph using a Bayesian latent class framework. Our results suggest that endogenous mobility biases estimated firm effects toward zero. To assess validity, we match our estimates of the wage components to out-of-sample estimates of revenue per worker. The corrected estimates attribute much more of the variation in revenue per worker to variation in match quality and worker quality than the uncorrected estimates.
View Full
Paper PDF
-
Slow to Hire, Quick to Fire: Employment Dynamics with Asymmetric Responses to News
January 2015
Working Paper Number:
CES-15-02
We study the distribution of employment growth when hiring responds more to bad shocks than to good shocks. Such a concave hiring rule endogenously generates higher moments observed in establishment-level Census data for both the cross section and the time series. In particular, both aggregate conditional volatility ("macro-volatility") and the cross-sectional dispersion of employment growth ("micro-volatility") are countercyclical. Moreover, employment growth is negatively skewed in the cross section and time series, while TFP is not. The estimated response of employment growth to TFP innovations is su ciently concave to induce signi cant skewness as well as movements in volatility of employment growth.
View Full
Paper PDF
-
Don't Quit Your Day Job: Using Wage and Salary Earnings to Support a New Business
September 2013
Working Paper Number:
CES-13-45
This paper makes use of a newly constructed Census Bureau dataset that follows the universe of sole proprietors, employers and non-employers, over 10 years and links their transitions to their activity as employees earning wage and salary income. By combining administrative data on sole proprietors and their businesses with quarterly administrative data on wage and salary jobs held by the same individuals both preceding and concurrent with business startup, we create the unique opportunity to quantify significant workforce dynamics that have up to now remained unobserved. The data allow us to take a first glimpse at these business owners as they initiate business ventures and make the transition from wage and salary work to business ownership and back. We find that the barrier between wage and salary work and self-employment is extremely fluid, with large flows occurring in both directions. We also observe that a large fraction of business owners takeon both roles simultaneously and find that this labor market diversification does have implications for the success of the businesses these owners create. The results for employer transitions to exit and non-employer suggest that there is a 'don't quit your day job' effect that is present for new businesses. Employers are more likely to stay employers if they have a wage and salary job in the year just prior to the transitions that we are tracking. It is especially important to have a stable wage and salary job but there is also evidence that higher earnings from the wage and salary job makes transition less likely. For nonemployers we find roughly similar patterns but there are some key differences. We find that having recent wage and salary income (and having higher earnings from such wage and salary activity) increases the likelihood of survival. Having recent stable wage and salary income decreases the likelihood of a complete exit but increases the likelihood of transiting to be an employer. Having recent wage and salary income in the same industry as the non-employer business has a large and positive impact on the likelihood of transiting to being a non-employer business.
View Full
Paper PDF
-
INNOVATION, REALLOCATION AND GROWTH
April 2013
Working Paper Number:
CES-13-23
We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 53 of GDP reduces welfare by about 1.53 because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 53 improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.
View Full
Paper PDF
-
Firm Market Power and the Earnings Distribution
December 2011
Working Paper Number:
CES-11-41
Using the Longitudinal Employer Household Dynamics (LEHD) data from the United States Census Bureau, I compute firm-level measures of labor market (monopsony) power. To generate these measures, I extend the dynamic model proposed by Manning (2003) and estimate the labor supply elasticity facing each private non-farm firm in the US. While a link between monopsony power and earnings has traditionally been assumed, I provide the first direct evidence of the positive relationship between a firm\'s labor supply elasticity and the earnings of its workers. I also contrast the semistructural method with the more traditional use of concentration ratios to measure a firm\'s labor market power. In addition, I provide several alternative measures of labor market power which account for potential threats to identification such as endogenous mobility. Finally, I construct a counterfactual earnings distribution which allows the effects of firm market power to vary across the earnings distribution. I estimate the average firm\'s labor supply elasticity to be 1.08, however my findings suggest there to be significant variability in the distribution of firm market power across US firms, and that dynamic monopsony models are superior to the use of concentration ratios in evaluating a firm\'s labor market power. I find that a one-unit increase in the labor supply elasticity to the firm is associated with wage gains of between 5 and 18 percent. While nontrivial, these estimates imply that firms do not fully exercise their labor market power over their workers. Furthermore, I find that the negative earnings impact of a firm\'s market power is strongest in the lower half of the earnings distribution, and that a one standard deviation increase in firms\' labor supply elasticities reduces the variance of the earnings distribution by 9 percent.
View Full
Paper PDF
-
Multi-Product Firms and Trade Liberalization
August 2009
Working Paper Number:
CES-09-21
This paper develops a general equilibrium model of international trade that features selection across firms, products and countries. Firms' export decisions depend on a combination of firm 'productivity' and firm-product-country 'consumer tastes', both of which are stochastic and unknown prior to the payment of a sunk cost of entry. Higher-productivity firms export a wider range of products to a larger set of countries than lower-productivity firms. Trade liberalization induces endogenous reallocations of resources that foster productivity growth both within and across firms. Empirically, we find key implications of the model to be consistent with U.S. trade data.
View Full
Paper PDF
-
Business Volatility, Job Destruction, and Unemployment
August 2008
Working Paper Number:
CES-08-26
Unemployment inflows fell from 4 percent of employment per month in the early 1980s to 2 percent or less by the mid 1990s and thereafter. U.S. data also show a secular decline in the job destruction rate and the volatility of firm-level employment growth rates. We interpret this decline as a decrease in the intensity of idiosyncratic labor demand shocks, a key parameter in search and matching models of unemployment. According to these models, a lower intensity of idiosyncratic shocks produces less job destruction, fewer workers flowing through the unemployment pool and less frictional unemployment. To evaluate the importance of this theoretical mechanism, we relate industry-level unemployment flows from 1977 to 2005 to industry-level indicators for the intensity of idiosyncratic shocks. Unlike previous research, we focus on the lower frequency relationship of job destruction and business volatility to unemployment flows. We find strong evidence that declines in the intensity of idiosyncratic labor demand shocks drove big declines in the incidence and rate of unemployment. This evidence implies that the unemployment rate has become much less sensitive to cyclical movements in the job-finding rate.
View Full
Paper PDF
