Recession Scars and the Growth Potential of Newborn Firms in General - PowerPoint PPT Presentation

Recession Scars and the Growth Potential of Newborn Firms in General Equilibrium cek ∗ and Vincent Sterk † Petr Sedl´ aˇ *Bonn University † University College London Dutch National Bank October 18, 2013 Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 1 / 56

Motivation Weak firm entry during Great Recession job creation of entrants in 2006: 3.5 million jobs job creation of entrants in 2010: 2.3 million jobs Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 2 / 56

Motivation Weak firm entry during Great Recession job creation of entrants in 2006: 3.5 million jobs job creation of entrants in 2010: 2.3 million jobs Does this have (persistent) macroeconomic effects? Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 2 / 56

This paper: 1. Empirical Analysis US Business Dynamics Statistics (BDS) data, 1979-2010 follow job creation by cohorts of entrants as they age ◮ extensive margin (number of firms) ◮ intensive margin (average firm size) document cyclical patterns quick & dirty counterfactuals for potential macro impact Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 3 / 56

This paper: 2. General Equilibrium Model build heterogeneous firm model with aggregate shocks ◮ heterogeneity in technology types ◮ endogenous entry ◮ aggregate shocks ◮ general equilibrium fit model to data redo counterfactuals, now accounting for GE effects Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 4 / 56

Empirical evidence Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 5 / 56

Data and methodology BDS data, 1979-2010 ◮ 98% of all US private employment ◮ annual information: number of firms, net job creation ◮ broken down according to age, size, sectors Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 6 / 56

Data and methodology BDS data, 1979-2010 ◮ 98% of all US private employment ◮ annual information: number of firms, net job creation ◮ broken down according to age, size, sectors employment and average firm size of entrants age breakdown → track them until 5 years old inspect patterns within and across cohorts Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 6 / 56

Three stylized facts 1. cohort-level employment is largely determined in year of birth 2. variation in cohort-level employment is mainly driven by intensive margin 3. cohorts of small firms are born in times of low economic activity Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 7 / 56

Stylized facts - 1. cohort employment highly persistent Cohort employment at t and t + 5 4 age 0 age 5 3.5 employment (millions) 3 2.5 2 1.5 1980 1985 1990 1995 2000 2005 2010 year of birth Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 8 / 56

Stylized facts - 1. cohort employment highly persistent Correlation of employment at t and t + a 1 cohort 0.8 0.6 correlation coefficient 0.4 0.2 0 -0.2 -0.4 1 1.5 2 2.5 3 3.5 4 4.5 5 age Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 9 / 56

Stylized facts - 1. cohort employment highly persistent Correlation of employment at t and t + a 1 cohort aggregate 0.8 0.6 correlation coefficient 0.4 0.2 0 -0.2 -0.4 1 1.5 2 2.5 3 3.5 4 4.5 5 age Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 10 / 56

Three stylized facts 1. cohort-level employment is largely determined in year of birth 2. variation in cohort-level employment is mainly driven by intensive margin 3. cohorts of small firms are born in times of low economic activity Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 11 / 56

Stylized facts - 2. intensive margin dominates decompose variation in cohort-level employment: ◮ intensive (firm size) vs. extensive (number of firms) margin ◮ according to age Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 12 / 56

Stylized facts - 2. intensive margin dominates decompose variation in cohort-level employment: ◮ intensive (firm size) vs. extensive (number of firms) margin ◮ according to age a a � � ln E a,t = ln S 0 ,t − a + ln N 0 ,t − a + ln γ j,t − a + j + δ j,t − a + j j =1 j =1 S a,t γ a,t = S a − 1 ,t − 1 N a,t δ a,t = N a − 1 ,t − 1 Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 12 / 56

Stylized facts - 2. intensive margin dominates Variance decomposition of E 5 ,t 80 5th year 70 4th year 3rd year 60 2nd year 1st year 50 Entrants 40 30 20 10 0 ‐ 10 Average firm size Number of firms Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 13 / 56

Three stylized facts 1. cohort-level employment is largely determined in year of birth 2. variation in cohort-level employment is mainly driven by intensive margin 3. cohorts of small firms are born in times of low economic activity Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 14 / 56

Stylized facts - 3. recession cohorts are small Cohort employment at t and t + 5 4 age 0 age 5 3.5 employment (millions) 3 2.5 2 1.5 1980 1985 1990 1995 2000 2005 2010 year of birth Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 15 / 56

Stylized facts - 3. recession cohorts are small Cohort-level average size; weak and strong cohorts 1.5 cohort (weak) cohort (strong) 1 deviation from trend/standard deviation age 0 0.5 0 -0.5 -1 -1.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 age Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 16 / 56

Stylized facts - 3. recession cohorts are small Cohort-level and aggregate average size; weak and strong cohorts employment 1.5 cohort (weak) aggregate (weak) cohort (strong) aggregate (strong) 1 deviation from trend/standard deviation age 0 0.5 0 -0.5 -1 -1.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 age Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 17 / 56

Stylized facts - 3. recession cohorts are small Table: Correlations of average size with BC indicators in year t age Levels linear trend CF filter(6,12) E/L E/L GDP E/L GDP cohort-level a = 0 0 . 50 0 . 36 0 . 33 0 . 74 0 . 61 a = 5 0 . 44 0 . 28 0 . 10 0 . 74 0 . 74 Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 18 / 56

Stylized facts - 3. recession cohorts are small Table: Correlations of average size with BC indicators in year t age Levels linear trend CF filter(6,12) E/L E/L GDP E/L GDP cohort-level a = 0 0 . 50 0 . 36 0 . 33 0 . 74 0 . 61 a = 5 0 . 44 0 . 28 0 . 10 0 . 74 0 . 74 aggregate-level a = 0 0 . 75 0 . 74 0 . 76 0 . 72 a = 5 − 0 . 17 − 0 . 37 − 0 . 73 − 0 . 65 Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 18 / 56

Stylized facts - 3. recession cohorts are small Table: Correlations of employment with BC indicators in year t age Levels linear trend CF filter(6,12) E/L E/L GDP E/L GDP cohort-level a = 0 0 . 62 0 . 41 0 . 43 0 . 76 0 . 72 a = 5 0 . 59 0 . 35 0 . 23 0 . 84 0 . 88 aggregate-level a = 0 0 . 91 0 . 88 0 . 96 0 . 98 a = 5 − 0 . 07 − 0 . 26 − 0 . 67 − 0 . 55 Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 19 / 56

What are the aggregate implications? Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 20 / 56

What are the aggregate implications? 2 counterfactual series for aggregate employment: ◮ extensive margin: hold the number of firms aged 0 to 5 fixed at average Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 20 / 56

What are the aggregate implications? 2 counterfactual series for aggregate employment: ◮ extensive margin: hold the number of firms aged 0 to 5 fixed at average ◮ both margins: hold the number and average size of firms aged 0 to 5 fixed at average Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 20 / 56

What are the aggregate implications? 2 counterfactual series for aggregate employment: ◮ extensive margin: hold the number of firms aged 0 to 5 fixed at average ◮ both margins: hold the number and average size of firms aged 0 to 5 fixed at average plot the differential from aggregate employment Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 20 / 56

What are the aggregate implications? Differential employment ( E t − E count,t 100 ) E t 2 1 0 percent of aggregate employment -1 -2 -3 -4 extensive margin fixed -5 1980 1985 1990 1995 2000 2005 2010 Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 21 / 56

What are the aggregate implications? Differential employment ( E t − E count,t 100 ) E t 2 1 0 percent of aggregate employment -1 -2 -3 -4 extensive margin fixed extensive and intensive margin fixed -5 1980 1985 1990 1995 2000 2005 2010 Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 22 / 56

What next? we observe 3 new stylized facts explanations ultimately interested in macroeconomic implications counterfactuals cannot account for GE effects! → build a GE model that can explain the above facts investigate scarring effects of recessions in model Sedl´ aˇ cek, Sterk (Bonn, UCL) Recession Scars DNB, October 2013 23 / 56