Does Foreign Competition Spur Productivity? Evidence From Post WWII - - PowerPoint PPT Presentation

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Does Foreign Competition Spur Productivity? Evidence From Post WWII - - PowerPoint PPT Presentation

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Does Foreign Competition Spur Productivity? Evidence From Post WWII U.S. Cement Manufacturing by Timothy Dunne, Shawn Klimek, and James Schmitz (Federal Reserve Bank of Cleveland, U.S. Census Bureau and Federal Reserve Bank of Minneapolis)

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Does Foreign Competition Spur Productivity? Evidence From Post WWII U.S. Cement Manufacturing

by Timothy Dunne, Shawn Klimek, and James Schmitz (Federal Reserve Bank of Cleveland, U.S. Census Bureau and Federal Reserve Bank of Minneapolis) April, 2009, Preliminary

Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau.

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Does Competition Spur Productivity? And, if so, how?

  • Old and important questions
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Related questions

  • Do lower tariffs spur productivity? And, if so, how?
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Ask These Questions in U.S. Cement Industry

  • Industry faced a surge in competition in mid 1980s

— Not from lower tariffs, but new transport technology, .... — Importers offer cement at substantial discounts to domestic — Imports go from very little to 25-30% of production

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We find that competition spurred productivity

  • TFP falling in 2 decades prior to import surge (10%)
  • TFP surges after imports, 35% in next decade
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What were sources of 1980s productivity gain?

  • Major source was changes in management practices

— Over 1960s, 1970s, firms signed contracts with union that put strong restricitons on mgmt — In 1980s, many of these restrictions lifted

  • Selection (closing low-productivity plants) not a big factor
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Imports “Forced” Efficient Production

  • Imports forced investment in new management practices
  • Will present theory later
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Outline

  • Show surge in competition, productivity
  • History of union, evolution of contracts
  • ∆s in contracts closely related to ∆s in productivity
  • Other sources of productivity growth (selection)
  • Regional competition and productivity
  • Related literature
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.8 .9 1 1.1 1.2 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996

(NBER Manufacturing Database, 1987=1)

Figure 2. Total Factor Productivity U.S. Cement Industry

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  • .6
  • .4
  • .2

1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995

Capital

1.2 1.3 1.4 1.5 1.6 1.7 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995

Energy

.7 .8 .9 1 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995

Material

4.6 4.8 5 5.2 5.4 5.6 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995

Labor

(NBER Manufacturing Database) (In Log's)

Figure 3. Partial Productivities U.S. Cement Industry

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Review

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History of Unionization in Industry

  • After WWII, nearly all plants unionized
  • Most plants — Cement, Lime and Gypsum Workers (CLGW)
  • Weak union until 1957, national strike idled half of plants
  • From 1957 on (till imports), CLGW greatly extended power
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By 1978, CLGW president could boast

“No other industrial workers in the country can point to contracts that impinge on and restrict the rights of man- agement as much as cement contracts do”

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Analysis of Contracts

  • Discuss contract clauses and expected productivity consequences
  • Show when clauses diffused into industry
  • Look at intro and removal of clauses & changes in productivity
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Contract Clauses & Productivity Consequences

  • Seniority rights

— If worker x loses job can bump any less senior worker — Worker does not even have to be able to do job — Must be able to do job in “reasonable amount of time”

  • Productivity consequences:

— Human capital (experience) lost with bumps — Mgmt no right in assignments — Morale? (cascading job bumping)

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Contract Clauses & Productivity Consequences

  • Job Protection

— “Employees will not be terminated by the Company as the result of mechanization, automation, change in production methods, the installation of new or larger equipment, the combining or the elimination of jobs.”

  • Productivity consequences

— Dulls incentives to invest/innovate

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Contract Clauses & Productivity Consequences

  • Jobs Belong to Departments and Individuals

— “.. when the Finish Grind Department is completely down for repairs, the Company will not use Repairmen assigned to the Clinker Handling Department on repairs in the Finish Grind Department.”

  • Productivity consequences

— When machines go down, they are down longer than nec- essary (ouput=0 longer than necessary) — Capital, labor, energy productivity lower as result

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Reflections on trip to Germany

  • German company invites union reps to visit plants
  • Many interesting reflections in Voice

“We were also told that if they have a breakdown during a shift, they use the people on that shift to make the repairs, if possible.” .... “They have breakdowns, as we do. The big difference is that almost anyone pitches in to fix it.”

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Contract Clauses & Productivity Consequences

  • Contracting out

— “All production and maintenance work customarily per- formed by the Company in its plant and quarry and with its own employees shall continue to be performed by the Company with its own employees.”

  • Productivity consequences

— Like infinite tariff at plant’s gate

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Diffusion of Contract Clauses

  • Contracts very thin in early 1950s (≈ 4 pages)
  • Contracts grow in length (by 1970s, ≈ 80+ pages)
  • Table 1 reports diffusion of two of the clauses above

— Contracts on 90 plants and counting — Clauses adopted in early to mid 60s — Disappear in 80s in most contracts

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Table 1 Union Contract Provisions US Cement Industry Job Protection Clause Before 1963 1963 1965 1966‐1984 1985‐1998 Number of Locals(plants) for which we have contracts 4 36 49 84 12 Number of Locals which have clause 47 81 3 Strong Contracting Out Clause Before 1963 1963 1965 1966‐1984 1985‐1998 Number of Locals(plants) for which we have contracts 4 36 49 84 12 Number of Locals which have clause 20 49 83 Note: Total Number of Locals = 90

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Did 1980s contract ∆s spur productivity?

  • Look at productivity over 3 eras (pre 57, 60s/70s, 80s+)

— Total industry — Two sub-industries

  • Look at differences across plants in adoption dates
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At industry and two sub-industries level

  • Look at partial productivities: electricity, fuel, capital, labor
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We find that

  • From end of WWII, until late 1950s, all productivities grow
  • Then all stop growing, some fall, with exception of labor

— It stops growing soon after 1965 (no-job-termination clause)

  • Productivities flat, or fall, until imports, with exception of fuel

— With energy crisis, major investments in fuel-efficient eq.

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7 7.5 8 8.5 9 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998

(Thousand Short Tons per Million kWh's)

Figure 5. Electricity Productivity U.S. Cement Production Per Unit of Electricity

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4.8 5 5.2 5.4 5.6 5.8 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990

(Log of Thousand Short Tons per Million BTU's)

Figure 6. Fuel Productivity U.S. Clinker Production per Unit of Fuel

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TFP for industry from WWII

  • Increases smartly to 1957, then follows NBER pattern
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4.8 5 5.2 5.4 5.6 5.8 6 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 Wet Dry

(Log of Thousand Short Tons per Million BTU's) By Process

Figure 12. Fuel Productivity U.S. Clinker Production per Unit of Fuel

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Differences across plants in adoption dates ....

  • Are these related to ∆s in plant relative productivities?

— Many plants simultaneously drop, and discard, clauses

  • Some variations in the 1980s we can exploit
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Review

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Other Sources of 1980s Productivity Gain?

  • Was selection (closing of low-productivity plants) a big source?
  • New Technology?
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Selection: Labor Productivity

  • Most of 80s productivity surge due to “within” plant growth
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Table 3 Labor Productivity Growth Decomposition Census Years Aggregate Productivity Growth Within Component Within Share 1972‐1977 0.055 0.019 1977‐1982 ‐0.028 ‐0.058 1982‐1987 0.386 0.280 72.5% 1987‐1992 ‐0.012 ‐0.035 1992‐1997 0.164 0.125 76.2%

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New Technology

  • No new significant technology in 1980s
  • If embodied in machines, note: 1970 investment much greater

than 1980s

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Related Literature

  • Many recent studies show

— Unilateral tariff reductions increase industry productivity ∗ Productivity gains in continuing plants

  • That is what we find here, of course
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Advantages of Studying Specific Industry

  • Concerns with measurement are fewer
  • Better chance at uncovering mechanism driving “within” growth
  • Understanding the mechanism can lead to theory
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Facts Hard to Explain in Standard Models

  • Facts from this industry, and from unitlateral tariff reductions.
  • Facts: plants make investments when industries shrinking
  • Selection models cannot
  • Standard technology adoption model cannot

— Fixed cost of adoption, bigger market means more adop- tion

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What Type of Theory Can Explain Facts?

  • Suppose adoption of new technology may initially raise costs
  • Then upon adoption, may lose sales to competitors
  • One cost of adoption: opportunity cost of lost profits
  • Those opportunity costs are high when prices (tariff) high
  • When tariffs unilaterally cut, market smaller, but opportunity

costs smaller

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See Tom Holmes for details

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Increase in foreign ownership

  • By 1982, owned lots of capacity, climbs since
  • Foreign owners more easily change work rules

— No long-term relationships — From what we see, they were fiercer

  • Foreign owners can bring in their local managers

— Mindset of U.S. managers #@!!!%

  • FDI?