david berger - jobless growth in a way that makes sense

Countercyclical Restructuring and Jobless Recoveries

David Berger

Northwestern

David Berger (Northwestern) Countercyclical Restructuring and Jobless Recoveries

Motivation: understanding jobless recoveries

The Great Recession1 Hours and employment still 7% below pre-recession high2 Average labor productivity was back above trend by 2009q2

.9.9

51

1.05

1.1

2007q1 2008q1 2009q1 2010q1 2011q1

Total hoursLabor productivity

Hours and Average Labor Productivity in the Great Recession


Stylized facts

Until mid-1980s

1 Employment rebounded quickly during recovery2 Average labor productivity (ALP) was strongly procyclical

Since mid-1980s

1 Last three recoveries have been jobless2 Low or negative correlation between ALP and output


New stylized facts

1 Jobless recoveries2 Less cyclical ALP

20

24

6%

chg

0 2 4 6 8Quarters since NBER trough

Avg pre911990912001200709

Total Hours

.50

.51

1947q3 1960q1 1972q3 1985q1 1997q3 2010q1

Rolling correlation: output and ALP


Results

Model can match new business cycle facts

Restructuring e¤ect on the intensive margin

Basic mechanism

Firms get "fat" during booms

learning takes time and adjustment is costly

Restructuring is concentrated in recessions

Employment adjustment cost is procyclical and costly in terms ofcurrent output


Intuition

Acyclical ALP

Selective �ring ) match quality is countercyclical

Jobless recoveries

Fire low quality workers and hire average quality workers


Results

Provide evidence on what changed in the 1980s

Large decline in union power ) more scope for selective �ringFirms more able to learn about worker quality

Model explains change by increased ability to selectively �re

Worker heterogeneity model without selective �ring explains pre-1984Worker heterogeneity model with selective �ring explains post-1984


Fact 1: Jobless recoveries

20

24

6%

chg


Avg pre911990912001200709

Total Hours

20

24

6%

chg


Employment


Fact 2: Correlation of output and ALP

.50

.51

1947q3 1960q1 1972q3 1985q1 1997q3 2010q1

Rolling correlation: output and ALP

Decline is robust to di¤erent choices of labor and output measure


Two period model

Goal:

1 Illustrate how heterogeneity, learning and selective �ring interact togenerate restructuring margin

2 Show how model can generate both countercyclical ALP and joblessrecoveries


Setup

Production

One homogeneous good is produced and sold in competitive markets

2 types of matches:

E¢ ciency units θH and θL with θH � θL

Total e¢ ciency units: θ(α) = αθH + (1� α)θL

Production function of establishment i : yi = z(θ(α)Li )γ

Learning

Match speci�c productivity of all new workers is unknown ex-ante

Average match quality of a new hire is exogenous and equal to p

Learn quality of match through production after one period (Jovanovic 1979)


Timing

First periodFirms endowed with (z1, L1, α1)

Second periodLearn quality of all employeesFirms hire or �re and produce output


Firms Problem

Given α1, L1 and z2, the �rm�s optimal employment in the second period, L2,solves:

maxL2z2�θ(α2)L2

�γ � L2

where γ 2 (0, 1) and α2 is given by the following weighted average:

α2 =

8>><>>:α1�L1L2

�+p

�L2�L1L2

�if hiring

α1�L1L2

�if �ring fewer than (1� a1)L employees

1 if �ring more than (1� a1)L employees

9>>=>>;


Implication 1: ALP

Consider what happens after a fall in TFP: z2 = (1� τ)z1Aggregate output and labor: Y =

Ryi and L =

RLi

ALP: Y /L

Selective �ring causes ALP to increase:

(Y /L)f > Y /L


Implication 2: Jobless recoveries

Consider what happens after an increase in TFP: z2 = (1+ τ)z1Employment growth rate if hiring:

Homogeneous �rm:

ge =h(1+ τ)

11�γ � 1

i=) hire when τ > 0

Heterogenous �rm:

ge =�

θ(α1)

θ(p)

� "�(1+τ)θ(p)

θ(α1)

� 11�γ � 1

#De�ne τ� = θ(α1)

θ(p)� 1

=) hire when τ > τ�


Implication 2: Jobless recoveries

We learn two things from : τ� = θ(α1)

θ(p)� 1

1 τ� > 0

Firms need larger TFP draws to begin hiring than in the homogenousworker model

2 τ� is increasing in α1

Firms with a better matched workforce in period one need larger TFPto begin hiring


What changed in the 1980s

Large decline in union power in the U.S. during the 1980s

Unions: layo¤s done by seniority rather than by quality

Union power # leads to more scope for selective �ring

Decline in union power:

2000

4000

6000

8000

1000

0N

umbe

r of e

lect

ions

1960 1965 1970 1975 1980 1985 1990 1995 2000

Source: Farber and Western (2004)

Number of NLRB Certification Elections


What changed in the 1980s

Large decline in union power in the U.S. during the 1980s

Unions: layo¤s done by seniority rather than by quality

Union power # leads to more scope for selective �ring

Decline in union power:20

0040

0060

0080

0010

000

Num

ber o

f ele

ctio

ns

1960 1965 1970 1975 1980 1985 1990 1995 2000

Source: Farber and Western (2004)

Number of NLRB Certification Elections


Testing the union power hypothesis

1 Idea: states with larger declines in union coverage rates should have largedeclines in corr(Y , YE )

2 Data: Annual data on output, employment and % of workers covered bycollective bargaining aggreements

3 Estimating Equation:

(ρi ,post95 � ρi ,pre85) = α+ β log(UC i ,post95/ UC i ,pre85) + ε


State level results

Change in corr(Y,Y/E) % change in corr(Y,Y/E)bα 0.082 0.182(0.183) (0.291)bβ 0.565* 0.878**(0.292) (0.431)

Observations 51 51R-squared 0.079 0.083


State level results: right-to-work states

Idea: If union power hypothesis is correct, results should be stronger in nonright-to-work states where unions were historically more powerful

Right-to-work states Non right-to-work statesChange in corr(Y,Y/E) Change in corr(Y,Y/E)bα -0.238 0.222

(0.393) (0.300)bβ 0.067 0.894**(0.470) (0.322)

Observations 21 29R-squared 0.006 0.128


Conclusion

Since mid-1980s:

Employment recoveries have been joblessALP has been acyclical

Standard models cannot match these facts

Model with countercyclical restructuring margin:

1 Generates a decline in the procyclicality of ALP2 Generates jobless recoveres after a large recessions3 Both output growth and changing productivity dynamics important

Provided evidence that structural change related to decline in union power


david berger - jobless growth in a way that makes sense

Economy & Finance

countercyclical alp

costly restructuring

restructuring margin

average labor productivity

selective ring firms

selective ring causes

alp decline

period firms