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Dynamism Diminished: The Role of Housing Markets and Credit Conditions

  1. Dynamism Diminished: The Role of Housing Markets and Credit Conditions Discussion by: Dan Andrews* Chief Advisor on Macroeconomic Modelling & Policy Co-Chair of OECD Global Forum on Productivity * Thanks to Nathan Deutscher and Jonathan Hambur Keeping pace with technological change: the role of capabilities and dynamism OECD GFP Conference | Sydney – 20 June 2019
  2. 10 15 20 25 10 15 20 25 2001 2003 2005 2007 2009 2011 2013 2015 2017 *Young firms are 0-5 years old Sources: De-identified matched employer-employee data; Australian Treasury %% The context: market dynamism has declined The employment share of young firms (< 5years) 2 A: United States B: Australia 1. Not an isolated incident: labour market dynamism has also declined 2. High stakes: sluggish productivity and wage growth 3. The doyens of dynamism: Davis + Haltiwanger are on the job
  3. Declining market dynamism: some big questions The literature has explored three key aspects of declining market dynamism: 1. The what: use high quality micro data in novel ways to explore the nature of the decline 2. The consequences: on productivity, wages, groups of people 3. The causes, ranging from: a) The benign (e.g. technology, demography) to… b) A policy concern (e.g. ↑ adj frictions wrt finance, labour; mkt power) Establishing the respective roles of 3a vs 3b is one of the biggest economic policy questions of our time 3 If we’re lucky… and if we’re really lucky… The paper contributes on all fronts. An impressive effort!
  4. The paper: summary • Result: a robust positive link between young firm employment shares and house prices at the local level – House prices matter more than bank loan supply – Young small firms more exposed than old small firms – The secular decline in young firm activity was reinforced by the post-2007 collapse in house prices • Channels: house prices matter for growth through – Wealth, liquidity, collateral and credit supply effects on the firm entry and post-entry growth margins – In addition to the canonical consumption demand channels • Consequences: younger (and less educated) workers are particularly affected by these developments 4
  5. Discussion - outline Discussion structure 1. Result: the house price and young firm activity link 2. Mechanisms: why are younger workers particularly affected  Using matched employee employer data to build a link between firm entry, labour market fluidity and young worker fortunes? 3. Implications: lessons for policymakers Approach: Draw on analysis for Australia using Treasury’s prototype longitudinal matched employee employer dataset. 5
  6. House prices: a new channel influencing market dynamism • Credible reasons why HPs and young firm activity should be linked • Similar pattern across states in AUS. Local-level analysis forthcoming • But is the link truly causal? 6 A: United States B: Australia
  7. Identification Plausibly exogenous variation in house prices: • Instrumented by Saiz (2010) housing supply elasticity interacted with boom/bust dummy (IV1) or local cycle (IV2) • Controlling for other cyclical shocks But more discussion on what supply elasticities pick-up would be useful • What if supply elasticities reflect regulations that also affect firm entry and labour mobility? 7 -5 0 5 10 15 20 25 30 10 12 14 16 18 20 22 24 26 28 30 Land use regulation index³ Supply responsiveness¹ Correlation coefficient: -0.46*** Supply elasticities vary with the regulatory burden across US cities Source: Andrews, D et al (2011), "Housing Markets and Structural Policies in OECD Countries", OECD Economics Department Working Papers, No. 836
  8. 0 10 20 30 40 0 10 20 30 40 Young firm (0-5 years old) Mature firm (>5 years old) Sources: De-identified matched employer-employee data; Australian Treasury * Young workers are those less than 30 years %% Mechanisms: why are young workers particularly affected? Why? Compositional effect at play as young workers are more likely to work in young firms (Ouinet & Zarutskie, 2014). 8 Composition of employment by firm age – Australia* Share of workers that are young When the young-firm share of local employment rises, local employment shifts from older to younger workers and from more- to less-educated workers. To the best of our knowledge, we are the first to uncover this relationship. –Davis and Haltiwanger (2019)
  9. Digging deeper: the role of job switching 9 Wages and job switching – Australia Purged of cyclical & demographic influences Source: Deutscher (2019), “Job-to-job transitions and the earnings of Australian workers” Treasury Working Paper forthcoming. • Job switching is a key mechanism for ↑ wages, esp. for young (Topel & Ward, ‘90) • Leading models of wages incorporate on-the-job search (Burdett & Mortensen ‘98) – More fluid labour markets associated with higher wages, even for stayers (Krahan et al, 2017, Deutscher 2019) • ↓ young firm activity could ↓ worker wages: – Job-ladder effects for the young – Bargaining power effects for all workers via ↓labour mkt fluidity
  10. What is the connection between declining young firm activity and job switching? 10 Workers are less likely to switch jobs in the US and Australia. Over one-half of the decline in AUS reflects less switching from old to young firms Old-to-young Switching and Entry Rate Market Dynamism Indicators – Australia 6 8 10 12 14 1 2 3 4 5 2003 2005 2007 2009 2011 2013 2015 * Young firms are 0-5 years old Sources: De-identified matched employer-employee data; Australian Treasury %% Old-to-young firm switch rate (LHS)* Firm entry rate (RHS)
  11. Firm entry creates outside options for workers and scope to switch jobs Higher firm entry is associated with more job switching, especially from mature to young firms. But no such relationship is evident for job switching between old firms (slide A1).11 Job switching and firm entry – Australia* All switching Switching: old-to-young firms Note: Areas are SA4; capital city treated as one area; purged of time and area effects and the employment share of young firms. Sources: De-identified matched employer-employee data; Australian Treasury
  12. Three key reminders for policy 1. Policies that impact house price dynamics affect growth: – Demand-side: canonical consumption channels – Medium-term potential: via firm dynamics (Davis & Haltiwanger) 12
  13. Three key reminders for policy 2. Young firms are particularly sensitive to policy settings 13 – Policies are typically designed in consultation with incumbents – But young firms have little voice • “we never observe the firms that choose not to enter” – Despite the fact that young firms disproportionately driving aggregate outcomes -6 -3 0 3 -6 -3 0 3 Mature Large Young Large Mature SME Young SME Gross Job Creation Gross Job Destruction Net Job creation * Young 0-5 years, Mature over 5 years. SMEs 0-199 FTE, Large 200 FTE or more Sources:ABS BLADE;Australian Treasury m Young Firms Drive Net Job Creation – Australia 2008 to 2016, full-time equivalents employment m
  14. Three key reminders for policy 3. Matched employee-employer data are critical a) Linking labour market fluidity to wage growth helps make the case for market-dynamism friendly policies. b) Treasury is collaborating to:  Include higher education data into our prototype matched employee employer database.  Leverage new technologies to open-up the access environment. c) Australia are microdata laggards but we are on a mission to catch-up to the frontier.  Davis and Haltiwanger is a great example of the policy-relevant analysis we can aspire to if we build our microdata capacity. 14
  15. SPARES 15
  16. A1. Job switching between old firms is negatively associated with firm entry 16 Job switching and firm entry – Australia* Old-to-young firm Note: Areas are SA4; capital city treated as one area; purged of time and area effects Sources: De-identified matched employer-employee data; Australian Treasury