Creative Destruction and Subjective Well-Being Philippe Aghion Ufuk Akcigit Harvard UPenn Angus Deaton Alexandra Roulet Princeton Harvard Harvard, April 7th 2014 Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 1
Creative Destruction and Subjective Well-Being Introduction Introduction (1) Should GDP growth be a primary objective for countries to pursue? The answer is far from being consensual. − → Some argue (e.g. Sen, Stiglitz and Fitoussi (2010)) that indicators other than (per capita) GDP growth should also be taken into account, in particular to reflect environmental quality, unemployment, and income inequality. → Others take a more radical stand and argue that GDP growth − is detrimental to ”happiness”, in particular because it constantly destroys jobs and skills; thus, according to that view, GDP growth should simply be disregarded as a social objective to pursue. Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 2
Creative Destruction and Subjective Well-Being Introduction Introduction (2) In this paper, we address this latter objection to growth head on, and investigate whether or when Schumpeterian creative destruction affects subjective well-being positively or negatively. Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 3
Creative Destruction and Subjective Well-Being Introduction Introduction (3) To measure creative destruction, we follow Davis, Haltiwanger and Schuh (1996) and use data come from the Business Dynamics Statistics, these data are at the MSA level We consider: Job turnover (job creation rate + job destruction rate) 1 Establishment turnover (highly correlated with job turnover) 2 Creation and destruction rates separately 3 Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 4
Creative Destruction and Subjective Well-Being Introduction Introduction (4) The data on subjective well-being come from the Behavioral Risk Factor Surveillance System : life satisfaction 1 question from 2005 onwards. the Gallup Healthways Wellbeing Index : several well-being 2 outcomes; starts in 2008. − → Both have very large sample size: ≈ 350, 000 respondents / year Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 5
Creative Destruction and Subjective Well-Being Introduction Introduction (5) To proxy for subjective well-being, we use: the BRFSS life satisfaction question, constructed using the question 1 ”In general how satisfied are you with your life?” the current Cantril ladder of life (from Gallup) , constructed using 2 the question ”imagine a ladder from 0 to 10...on which step do you personally feel you stand at this time?” the anticipated Cantril ladder of life, based the question ”which 3 level of the ladder do you anticipate to achieve in five years?” We also look at a measure of individuals’ worry Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 6
Creative Destruction and Subjective Well-Being Introduction Introduction (6) A higher rate of turnover has both, a direct and an indirect effect on life satisfaction Displacement effect: The direct effect is that, everything else equal 1 more turnover should reduce life satisfaction as it translates into a higher probability of becoming unemployed Capitalization effect: The indirect effect is that a higher rate of 2 turnover implies a higher growth externality and therefore a higher net present value of future earnings, which in turn could translate into higher life satisfaction In this paper we look at how these two effects play out for different types of individuals and also in states with differing unemployment benefit policies Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 7
Creative Destruction and Subjective Well-Being Introduction Introduction (7): Main findings Our first finding is that the effect of creative destruction on life satisfaction is unambiguously positive when we control for MSA-level unemployment, less so if we do not Job turnover has an effect on life satisfaction of the opposite sign but of a similar magnitude as that of the unemployment rate It has a substantially larger positive effect on anticipated well-being; yet it is also associated with more ”worry” We find that creative destruction increases life satisfaction more in states with more generous unemployment benefits We also look at interactions with individual characteristics and with the MSA unemployment rate Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 8
Creative Destruction and Subjective Well-Being Introduction Introduction (7): Related literature Literature on growth, job turnover and unemployment: e.g see Davis, Haltiwanger, and Schuh (1996), Mortensen and Pissarides (1998), and Aghion and Howitt (1998) − → we contribute to this literature by looking at how turnover affects subjective well-being, not just growth Literature on income and well-being: e.g see Easterlin (1974), Blanchflower and Oswald (2004), Di Tella et al (2007), Deaton (2008), Stevenson and Wolfers (2008), Deaton and Stone (2013) → we contribute to this literature by putting firms and firm − turnover on the RHS of the regression equations Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 9
Creative Destruction and Subjective Well-Being Outline Outline Introduction 1 Model 2 Data and specification 3 Results 4 Conclusion 5 Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 10
Creative Destruction and Subjective Well-Being Model Model (1) Model with Schumpeterian creative destruction which generates growth 1 generates endogenous obsolescence of firms and jobs 2 Workers in obsolete firms join the unemployment pool until they are matched to a new firm. Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 11
Creative Destruction and Subjective Well-Being Model Model (2) Creative destruction has: a positive effect on well-being through economic growth 1 a negative effect on well-being through unemployment due to 2 obsolescence Which of these two effects effect dominates, depends upon individual characteristics (discount rate, degree of risk-aversion,...) and upon local labor market (generosity of unemployment insurance) Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 12
Creative Destruction and Subjective Well-Being Model Model (3): Production technology The economy is populated by infinitely-lived and risk-neutral individuals of measure one, and they discount the future at rate ρ = r . The final good is produced according to: � ln Y t = j ∈J ln y jt dj where J ⊂ [ 0, 1 ] is the set of active product lines, with measure J ∈ [ 0, 1 ] invariant in steady state Each intermediate firm produces using one unit of labor according to the following linear production function, y jt = A jt l jt , where l jt = 1 is the labor employed by the firm, and the same in all sectors Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 13
Creative Destruction and Subjective Well-Being Model Model (4): Innovation An innovator in sector j at date t will move productivity in sector j from A jt − 1 to A jt = λ A jt − 1 The innovator is a new entrant, and entry occurs in each sector with Poisson arrival rate x which we take to be exogenous Upon entry in any sector, the previous incumbent firm becomes obsolete and its worker loses her job and the entering firm posts a new vacancy Production in that sector resumes with the new technology when the firm has found a new suitable worker. Thus the measure of inactive product lines is equal to the unemployment rate u t = 1 − J t , where u denotes the equilibrium unemployment rate. Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 14
Creative Destruction and Subjective Well-Being Model Model (5): Labor market and job matching Let m ( u t , v t ) = u α t v 1 − α t denote the arrival rate of new matches between firms and workers, where u t denotes the number of unemployed at time t and v t denotes the number of vacancies. The flow probability for each unemployed worker to find a suitable firm is m ( u t , v t ) / u t The flow probability for any new entrant firm to find a suitable new worker is m ( u t , v t ) / v t Finally, we assume that in each intermediate sector where a worker is currently employed, the worker appropriates fraction β of revenues whereas the complementary fraction ( 1 − β ) accrues to the employer. Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 15
Creative Destruction and Subjective Well-Being Model Model (6): Valuations and life satisfaction Our proxy for life satisfaction is the average present value of an individual employee, namely: W t = u t U t + ( 1 − u t ) E t , where: U t is the net present value of an individual who is currently 1 unemployed E t is the net present value of an individual who is currently 2 employed. Asset equations: ρ E t − ˙ E t = w t + x ( U t − E t ) ρ U t − ˙ U t = b t + ( m ( u t , v t ) / u t )( E t − U t ) Aghion (Harvard), Akcigit (UPenn), Deaton (Princeton), and Roulet (Harvard) 16
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