Measuring Micro and Macro Productivity Dynamics Remarks By John Haltiwanger

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

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

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

Table III.1 (B) Definitions of Measures Estimation methodology: 1 Net book value of total capital, Share of total output 2 Net book value of machinery and equipment, Share of total output 3 Replacement value of total capital, Share of total output 4 Replacement value of machinery and equipment, Share of total output 5 Net book value of total capital, Share of total cost 6 Net book value of machinery and equipment, Share of total cost 7 Replacement value of total capital, Share of total cost 8 Replacement value of machinery and equipment, Share of total cost 9 Net book value of total capital, OLS 10 Net book value of machinery and equipment, OLS 11 Replacement value of total capital, OLS 12 Replacement value of machinery and equipment, OLS Source: Haltiwanger and Schweiger (2004)

Table III.2 Average Pairwise Correlation of TFP Measures Using Alternative Estimation and Measurement Methods r(lnprod,lntfp10p)0.6834* r(lntfp1p,lntfp10p)0.8093* r(lntfp2p,lntfp10p)0.8679* r(lntfp3p,lntfp10p)0.7889* r(lntfp4p,lntfp10p)0.7995* r(lntfp5p,lntfp10p)0.9826* r(lntfp6p,lntfp10p)0.9897* r(lntfp7p,lntfp10p)0.9784* r(lntfp8p,lntfp10p)0.8599* r(lntfp9p,lntfp10p)0.9951* r(lntfp11p,lntfp10p)0.9718* r(lntfp12p,lntfp10p)0.9784* Note: Reported correlations are based upon pooled data. See Table III.1 (B) for definitions of measures. Lntfp is log TFP so using Table III.1 (B) we can see that ntfp10p is the log TFP using pooled production function estimated via OLS using net book value of machinery and equipment. Source: Haltiwanger and Schweiger (2004)

PRODUCTIVITY SHOCKS TFP - residual from KLEM production function: TFP - residual from KLEM production function: where the production function is estimated in logs: Inputs may be correlated w/ productivity, so use IVs: (a) Output of downstream producers. (b) Regional governments expenditures. (c) 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). 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)

TABLE 2: PRODUCTION FUNCTION

TABLE 3: DIFFERENT TFP MEASURES

TABLE 6: DETERMINANTS OF EXIT PROBABILITY

Specification:[1] [2][3][4][5][6] [7] Revenue TFP Physical TFP Prices Demand Shock U.S. Exit Selection Results Source: Foster, Haltiwanger and Syverson (2005)

Aggregate productivity and allocation Olley and Pakes (1996) static decomposition: 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 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. 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 Requires representative cross sectional samples but does not require accurate longitudinal linkages Cannot quantify directly importance of entry and exit Cannot quantify directly importance of entry and exit By construction, cross term takes out country effects so abstracts from some aspects of measurement error By construction, cross term takes out country effects so abstracts from some aspects of measurement error

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

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

Source: Eslava et al. (2005)

Dynamic decomposition of productivity growth Advantages: Advantages: Explicit measure of contribution of entry and exit Explicit measure of contribution of entry and exit Disadvantages: Disadvantages: Horizon dependent 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 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

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

Source: Foster, Haltiwanger and Krizan (2005)

Variable Weighted Regression Exit Dummy Entry Dummy Revenue TFP Physical TFP Price Demand Shock Differences Between continuing, entering and exiting establishments in U.S. Manufacturing Source: Foster, Haltiwanger and Syverson (2005)

TotalGrowth Components of Decomposition (FHK/BHC) WithinBetweenCrossEntryExit Net Entry Revenue Physical Components of Decomposition (GR) WithinBetweenEntryExit Net Entry Revenue Physical Sensitivity of U.S. Manufacturing Decomposition to Prices Source: Foster, Haltiwanger and Syverson (2005)

Guidance? Micro/macro links critical Micro/macro links critical Large fraction of level of productivity associated with allocative efficiency 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 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 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? Greater weight on representative sample with micro/macro links than TFP vs. Labor productivity? But measurement matters: But measurement matters: Prices and market structure matter and are often missing piece in micro/macro link Prices and market structure matter and are often missing piece in micro/macro link