Labour Reallocation and Productivity Dynamics: Financial Causes, Real Consequences 1 Enisse Kharroubi Bank for International Settlements XI th Annual Seminar on Risk, Financial Stability and Banking Sao Paulo, Brazil August 10-12, 2016 1 The views expressed here are those of the authors and do not necessarily represent the views of the BIS. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 1 / 25
Introduction Secular stagnation in advanced economies : I (i) Prior to the crisis, growth was only modest despite signi…cant tailwinds. I (ii) After the crisis, the recovery has been abnormally weak, despite signi…cant improvement in credit availability. Increased credit dependence in emerging market economies I (i) Growth has been more resilient, but has relied extensively on high commodity prices and wide credit extension. I (ii) weaker commodity prices and credit may jeopardize future growth. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 2 / 25
Introduction What we do in this paper? I We look at the e¤ects of credit booms on growth. We provide theory and evidence that: I Credit booms can have negative supply side e¤ects through labor reallocation I Labour reallocations have large implications for future productivity following a …nancial crisis Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 3 / 25
Methodology and data Methodology Write total output (employment) as the sum of sectoral outputs (employments): y = ∑ y s and l = ∑ l s . s s Denote S number of sectors and x the unweighted (simple average) for x s � l s � � � y / l = 1 S ∑ ( y s / l s ) = y s / l s + cov l s / l ; y s / l s l / S s Denote α s = y s / y sector s relative output size, and x g the growth rate of x � 1 + ( l s / l ) g � � 1 + α s ( y s / l s ) g � � ( l s / l ) g ; � 1 + ( y s / l s ) g � � 1 + ( y / l ) g = + cov α s | {z } | {z } alloc com Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 4 / 25
Methodology and data Data We build a dataset with: I 1 digit sector-level data: output, employment, prices (STAN, KLEMS, GGDC, EUROSTAT) I Macro data: real, …nancial and policy (STAN, KLEMS, BIS, EO, IMF) Main requirement: sector-level data should provide a partition of the economy, i.e. allow to replicate the country-level data Dataset covers advanced economies, 21 OECD countries, over 1979-2009. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 5 / 25
Methodology and data Speci…cation We estimate the following regression 2 3 ( y / l ) g 4 5 = α c + α t + β x c , t + β l l g c , t + θ f g com c , t + ε c , t alloc c , t Dependent variable: I labour productivity growth (comp.) in country c in year t (non-OL periods) Independent variables: I Country and time e¤ects (focus on within-country idiosyncratic credit booms) I Control variables (government consumption, in‡ation, trade openness, etc..) I Employment growth (decreasing marginal returns to labour) I Credit growth (average for credit to GDP growth or credit to GDP deviation from trend) Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 6 / 25
Productivity growth during credit booms Bivariate correlations We start estimating the baseline speci…cation without any control variable: � � alloc = α c + α t + θ f g c , t + ε c , t com c , t Growth in private credit to GDP correlates negatively with the allocation component of productivity growth, not with the common component. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 7 / 25
Productivity growth during credit booms OLS estimates (i.a) (ii.a) (iii.a) (i.b) (ii.b) (iii.b) Productivity Common Allocation Productivity Common Allocation Growth component component Growth component component -0.077** -0.032 -0.045*** Growth in private credit to GDP (0.0370) (0.0399) (0.0170) Average private credit to GDP -0.0729*** -0.0318 -0.0412* gap (0.0131) (0.0549) (0.0228) -0.372*** -0.514*** 0.142** -0.409*** -0.529*** 0.120** Employment growth (0.080) (0.093) (0.058) (0.067) (0.094) (0.058) Controls Yes Yes Yes Yes Yes Yes Country and time dummies Yes Yes Yes Yes Yes Yes Observations 108 108 108 108 108 108 R-squared 0.864 0.854 0.695 0.858 0.854 0.681 Productivity growth goes down during credit booms, mainly because of the allocation component. By contrast no statistically signi…cant e¤ect on the common component. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 8 / 25
Productivity growth during credit booms Decomposing the allocation component During credit booms, allocation component goes down. Why? 1 Shifts in the distribution of sectoral productivity gains: I Productivity slows-down in high employment growth sectors, and accelerates in low employment growth sectors 2 Shifts in the distribution of sectoral employment shares: I Employment picks-up in low-productivity gain sectors, and goes down in high-productivity gain sectors We test which part of the allocation component reacts negatively during credit booms. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 9 / 25
Productivity growth during credit booms Decomposing the allocation component (i.a) (ii.a) (iii.a) (iv.a) (i.b) (ii.b) (iii.b) (iv.b) due to shifts in the distribution of due to shifts in the distribution of Allocation Allocation component component Productivity Employment both Productivity Employment both Private credit to GDP -0.045*** 0.002 -0.041*** -0.006 growth (0.017) (0.007) (0.016) (0.006) Average private credit to -0.041* 0.006 -0.044** -0.004 GDP gap (0.023) (0.008) (0.021) (0.007) 0.142** -0.049** 0.190*** 6.5e-05 0.120** -0.049*** 0.171*** -0.003 Employment growth (0.058) (0.019) (0.054) (0.013) (0.058) (0.018) (0.054) (0.014) Controls yes yes yes yes yes yes yes yes Country and time dummies yes yes yes yes yes yes yes yes 108 108 108 108 108 108 108 108 Observations 0.695 0.852 0.653 0.692 0.681 0.853 0.644 0.687 R-squared Main reason for productivity slows-down during credit booms: I labour reallocation from high to low productivity gains sectors. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 10 / 25
Productivity growth during credit booms Instrumenting credit booms Do credit booms slow-down productivity or do productivity slow-downs cause credit booms? Latter is unlikely for two reasons: I Productivity a¤ects credit through the cycle, but we focus on medium-term developments (3-5 years) I Credit may react to productivity in case of generalized slow-down, but evidence in favour of labour reallocation We test for reverse causality by instrumenting credit booms with …nancial reforms. I No evidence that …nancial reforms are related to productivity growth. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 11 / 25
Productivity growth during credit booms Instrumenting credit booms (i.a) (ii.a) (iii.a) (iv.a) (i.b) (ii.b) (iii.b) (iv.b) Employment- Employment- Productivity Common Allocation Productivity Common Allocation Allocation Allocation Growth component component Growth component component component component -0.137*** -0.055 -0.082*** -0.080*** Private credit to GDP growth (0.046) (0.058) (0.027) (0.031) Average private credit to -0.188*** -0.081 -0.107*** -0.102*** GDP gap (0.069) (0.0750) (0.036) (0.040) -0.681*** -0.934*** 0. 253*** 0.351*** -0.873*** -1.012*** 0.139 0.241** Employment growth (0.158) (0.175) (0.094) (0.096) (0.187) (0.178) (0.102) (0.0947) Controls yes yes Yes yes yes yes yes yes Country and time dummies yes yes Yes yes yes yes yes yes J-stat 3.477 2.003 1.497 0.526 1.425 1.358 0.741 0.0599 p. value (0.324) (0.572) (0.683) (0.913) (0.700) (0.715) (0.863) (0.996) LM-test 18.26 18.26 18.26 18.26 14.97 14.97 14.97 14.97 p. value (0.001) (0.001) (0.001) (0.001) (0.0048) (0.0048) (0.0048) (0.0048) Observations 102 102 102 102 102 102 102 102 R-squared 0.491 0.503 0.140 0.133 0.346 0.466 0.048 0.138 Negative relationship between productivity growth and credit booms I robust to instrumentation I driven by labour reallocation into low productivity gains sectors Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 12 / 25
The model The general framework OLG model with entrepreneurs living 2 periods. I Start with a bequest from the previous generation; choose, for life time , one project type; raise funding and invest bequest and borrowing I Reap output and pay claims back ; save and bequeath to the next generation; raise funding and invest savings and borrowing I Reap output and and pay claims back; consume. Borio, Kharroubi, Upper and Zampolli () Reallocation and Productivity August 10-12, 2016 13 / 25
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