Measuring Micro and Macro Productivity Dynamics

1. Measuring Micro and Macro Productivity Dynamics Remarks By John Haltiwanger

2. Overview • Objectives: • Measure productivity at micro and macro levels in consistent fashion • Reallocation dynamics at micro level important for aggregate • Track firm dynamics including entry and exit to measure and analyze importance of static and dynamic allocative efficiency vs. “within firm productivity” growth • Challenges: • TFP difficult to measure • Firm dynamics difficult to measure

3. Methodological Issues Challenges: 1. Difficult to measure outputs and inputs especially capital a. Capital b. Prices especially at micro level 2. Estimating factor elasticities: a. OLS b. Cost Shares c. Proxy methods (Olley-Pakes; Levinsohn-Petrin) d. IV

4. Mixed Messages on Challenges… • Labor productivity and TFP often highly correlated • More important to get representative sample and firm dynamics than TFP? • Capital measurement difficult and potentially important for policies/institutions • Price/output measurement difficult given data limitations and very important for positive and normative implications

5. Source: Haltiwanger and Schweiger (2004)

6. Source: Haltiwanger and Schweiger (2004)

7. PRODUCTIVITY SHOCKS • TFP - residual from KLEM production function: where the production function is estimated in logs: Inputs may be correlated w/ productivity, so use IVs: • Output of downstream producers. • Regional governments expenditures. • Energy and materials prices. • Estimated factor elasticities by sector using cost-share approach and results are robust (e.g., correlation between two measures is 0.88 and moments very similar). Source: Eslava et al. (2005)

8. TABLE 2: PRODUCTION FUNCTION

9. TABLE 3: DIFFERENT TFP MEASURES

10. TABLE 6: DETERMINANTS OF EXIT PROBABILITY

11. U.S. Exit Selection Results Source: Foster, Haltiwanger and Syverson (2005)

12. Aggregate productivity and allocation • Olley and Pakes (1996) static decomposition: where: N: # of firms in a sector; • The first term is the unweighted average of firm-level productivity, • The second term reflects allocation of resources: do firms with higher productivity have greater market share. • Requires representative cross sectional samples but does not require accurate longitudinal linkages • Cannot quantify directly importance of entry and exit • By construction, cross term takes out country effects so abstracts from some aspects of measurement error

13. The cross-sectional efficiency of the allocation of activity Source: Bartelsman, Haltiwanger and Scarpetta (2005)

14. The cross-sectional efficiency of the allocation of activity Source: Bartelsman, Haltiwanger and Scarpetta (2005)

15. Source: Eslava et al. (2005)

16. Dynamic decomposition of productivity growth • Advantages: • Explicit measure of contribution of entry and exit • Disadvantages: • Horizon dependent • Experimentation, learning and selection may make especially dynamic economies have a low contribution of net entry at short horizons but high contribution at long horizons

17. Within-firm productivity growth dominates at five-year horizons in Mfg Source: Bartelsman, Haltiwanger and Scarpetta (2005)

18. Source: Foster, Haltiwanger and Krizan (2005)

19. Differences Between continuing, entering and exiting establishments in U.S. Manufacturing Source: Foster, Haltiwanger and Syverson (2005)

20. Sensitivity of U.S. Manufacturing Decomposition to Prices Source: Foster, Haltiwanger and Syverson (2005)

21. Guidance? • Micro/macro links critical • Large fraction of level of productivity associated with allocative efficiency • Important contribution of changes in allocative efficiency and/or reallocation/net entry components for productivity growth • Measurement of TFP challenge in general and especially at micro level • Greater weight on representative sample with micro/macro links than TFP vs. Labor productivity? • But measurement matters: • Prices and market structure matter and are often missing piece in micro/macro link