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 Recession
1 Hours and employment still 7% below pre-recession high
2 Average labor productivity was back above trend by 2009q2
.9.9511.051.1
2007q1 2008q1 2009q1 2010q1 2011q1
Total hours
Labor productivity
Hours and Average Labor Productivity in the Great Recession

Stylized facts
Until mid-1980s
1 Employment rebounded quickly during recovery
2 Average labor productivity (ALP) was strongly procyclical
Since mid-1980s
1 Last three recoveries have been jobless
2 Low or negative correlation between ALP and output

New stylized facts
1 Jobless recoveries
2 Less cyclical ALP
-20246
%chg
0 2 4 6 8
Quarters since NBER trough
Avg pre-91
1990-91
2001
2007-09
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 of
current 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 …ring
Firms more able to learn about worker quality
Model explains change by increased ability to selectively …re
Worker heterogeneity model without selective …ring explains pre-1984
Worker heterogeneity model with selective …ring explains post-1984

Fact 1: Jobless recoveries
-20246
%chg
0 2 4 6 8
Avg pre-91
1990-91
2001
2007-09
Total Hours
-20246
%chg
0 2 4 6 8
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 to
generate restructuring margin
2 Show how model can generate both countercyclical ALP and jobless
recoveries

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 period
Firms endowed with (z1, L1, α1)
Second period
Learn quality of all employees
Firms hire or …re and produce output

Firms Problem
Given α1, L1 and z2, the …rm’s optimal employment in the second period, L2,
solves:
max
L2
z2 θ(α2)L2
γ
L2
where γ 2 (0, 1) and α2 is given by the following weighted average:
α2 =
8
>><
>>:
α1
L1
L2
+p L2 L1
L2
if hiring
α1
L1
L2
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)z1
Aggregate output and labor: Y =
R
yi and L =
R
Li
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)z1
Employment growth rate if hiring:
Homogeneous …rm:
ge =
h
(1 + τ)
1
1 γ 1
i
=) hire when τ > 0
Heterogenous …rm:
ge = θ(α1)
θ(p)
"
(1+τ)θ(p)
θ(α1)
1
1 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 homogenous
worker model
2 τ is increasing in α1
Firms with a better matched workforce in period one need larger TFP
to 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

Union power # leads to more scope for selective …ring
Decline in union power:
200040006000800010000
Numberofelections
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 large
declines in corr(Y , Y
E )
2 Data: Annual data on output, employment and % of workers covered by
collective bargaining aggreements
3 Estimating Equation:
(ρi,post95 ρi,pre85) = α + β log(UCi,post95/ UCi,pre85) +

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 51
R-squared 0.079 0.083

State level results: right-to-work states
Idea: If union power hypothesis is correct, results should be stronger in non
right-to-work states where unions were historically more powerful
Right-to-work states Non right-to-work states
Change 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 29
R-squared 0.006 0.128

Conclusion
Since mid-1980s:
Employment recoveries have been jobless
ALP has been acyclical
Standard models cannot match these facts
Model with countercyclical restructuring margin:
1 Generates a decline in the procyclicality of ALP
2 Generates jobless recoveres after a large recessions
3 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

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