seminario cede march 3rd 2016

IntroductionFrameworkDiscussion

Other results

Size-dependent distortions and labor substitution: Laboroutsourcing and missing gaps.

Carlos Ospino1

1Universidad de los Andes

Seminario CEDE.Bogotá, Colombia.March 3rd, 2016

Carlos Ospino Size-dependent policies and labor substitution 1/33


Other results

MotivationLiterature

This paper

I study theoretically and empirically how the fact that firms may substitute be-tween different types of employment changes the implications of Size-DependentPolicies (SDP) in terms of labor demand.

Literature has focused on homogeneous labor.

Introducing labor heterogeneity and potentialsubstitution reconciles model implications withempirical evidence: With substitution SDPdoes not generate a gap in the employmentdistribution at the policy threshold.

Highly policy relevant: 1-Prevalent policies onspecific types of employment (e.g. direct la-bor), 2-World-wide trend towards contract la-bor. Source: Garicano et. al., 2015



Other results


Ratio of outsourced workers to directly hired workers increased...

Source: Own calculations using Colombia’s Annual Manufacturing Survey. Dashed lines at years 2002 and 2006.

After a major labor reform in 2002.Apprenticeship compulsory quotasstarted being calculated usingdirectly hired labor (a tax on directlabor).Size Dependent: only for 15+directly hired workers.



Other results


... and the ratio of outsourced to direct labor grew particularly before the thresholdof the policy (15 workers).

Source: Own calculations using Colombia’s Annual Manufacturing Survey. 2002-2003. Vertical line at 14 directly hired workers.Carlos Ospino Size-dependent policies and labor substitution 4/33


Other results


Related literature I

Misallocation and productivityTheoretical size-dependent models imply that the size distribution of firms hasa spike (“bunching”) right before the threshold where SDP kick-in, and a gapat the threshold. (Guner, Ventura & Xu, 2008).

1 Some studies find bunching before threshold, but positive mass (a valley) wherea gap was expected. ((Garicano, LeLarge, & Van Reenen (2015), (Gourio &Roys (2014)).

2 These papers model distortion as combination of fixed costs, proportional taxesand measurement error to match the data.

Could this bunching and lack of a gap be explained by labor substitution?



Other results


Related literature II

Labor substitution and employment protectionRamaswamy (2013) and Chaurey (2015) study the case of contract workersin India.

Firms substitute towards the labor type that’s not subject to size-dependentregulation at the threshold.

Marked increase in the share of contract labor in states where legislation ispro-worker.



Other results


Preview of results

Compared with models of SDP with homogeneous labor:Taxes on direct labor also reduce total labor demand both by firms at thethreshold and those above it.But labor substitution allows some firms that would bunch to keep their sizeabove the policy threshold: No gap in the employment distribution at thethreshold....even with imperfect labor substitution.Regulation induces a change in the employment composition.

Colombian manufacturing firms react to the 2002 reform according to what themodel predicts:

1 Reduced total and direct labor demand for firms above and just below thethreshold compared to those well below it.

2 Increased the ratio of outsourced to direct labor demand for firms above thethreshold compared to those well below it.



Other results

Model outline

Firm problem

max{nd ,no}

π(s,n) = s1−γ [(nd )σ(no)1−σ]γ − wdnd − wono − τ(n̂d ) (2.1)

s.t. τ(n̂d ) = 0 if nd ≤ n̂d .τ(n̂d ) = αnd if nd > n̂d .

Production function a la Guner, Ventura & Xu (2008): Lucas (1978) “Span ofcontrol” model with SDP.s: Exogenous idiosyncratic productivity.Two types of labor: Imperfect substitution.Tax on one type.



Other results

Model outline

Firm problem GVX

max{n,k}

π(s,n) = s1−γ [(n)σ(k)1−σ]γ −W (1 + τ)n − kR (2.2)

Labor costs are discontinuous at n̂:Wn if n ≤ n̂W (1 + τ)n if n > n̂“Set of inputs that will not be demanded,[n̂,n+]”“implication of this type of policy is a “gap”in the size distribution for establishments byemployment (or by capital use)”



Other results

Model outline

Types of firms

DefinitionUndistorted firms are those whose direct labor demand is at most n̂d and arenot subject to the size-dependent regulation. Distorted firms are those whoselabor demand is greater than n̂d and are therefore subject to the size-dependentregulation. (Labor) Constrained firms are firms who fix the demand of direct laborat n̂d in order to avoid being subject to the regulation.



Other results

Model outline

Note: Functions simulated using a log normal distribution and the followingparameter values: γ=0.802, σ=0.65, α=0.025, Wo=0.14, Wd =0.2, n̂d =14.s−=0.160, s+=0.527

Solution to firm problem impliesthat:Profit maximization separates firmsin three groups:s−(s+) is recovered by equatingΠ(s,wi , n̂d ) = Π(s,wi(, τ)).

1 Undistorted firms: Those withs ∈ [0, s−]

2 (Labor) Constrained firms: Thosewith s ∈ [s−, s+]

3 Distorted firms: Those withs ∈ [s+,1]



Other results

Model outline

Note: Functions simulated using a log normal distribution and the following parameter val-ues: γ=0.802, σ=0.65, α=0.025, Wo=0.14, Wd =0.2, n̂d =14. s−=0.160, s+=0.527

Outsourced labor demand isincreasingly nonlinear ins ∈ [s−, s+].Demand for outsourced labor byconstrained and distorted firms fallsby less than demand for direct laborand generates a higher ratio of labortypes relative to undistortedeconomy.



Other results

Model outline

Assume wages can’t adjust

Partial Equilibrium still useful tostudy employment effects.SDP generate unemployment!SDP change the relativecomposition of employment in theeconomy (LM segmentation).The policy implications aresubstantial:

Fiscal costs: Employers avoidcontributing to social protection.Worker’s well being: Less favorablecontracts. Less incentives to investin human capital.



Other results

Model outline


nond

is:1 Same as undistorted economy for

undistorted firms.2 Increasing in productivity for

constrained firms.3 Higher than undistorted economy

for distorted firms.

At s+ there’s a jump in the ratio oflabor types.



Other results

Model outline

What about “The Gap”? I


Total demand is continuous at thethreshold (n̂d=14).A sufficient condition for the absenceof a gap at the threshold is given by:

R > 0

...which is always satisfied in thismodel because of imperfect substi-tutability of labor in the technology.



Other results

Empirical exercise

Model predictions I

Relative to the distortion-free world, with labor substitution a size-dependentpolicy:

1 Reduces total, direct and outsourced labor demand by constrained and distortedfirms.

2 Increases the ratio of outsourced to direct labor for constrained and distortedfirms.

3 Labor demands (their ratio, Rα) increase (decreases) discontinuously at s+ forfirms subject to the regulation compared to constrained firms.



Other results

Empirical exercise

Empirical approximation I

Take advantage of exogenous variation in apprenticeship contract regulationwhich was overhauled in Dic. 2002.

Apprentices quota calculated using direct number of workers starting 2003.Up to 2002 quota used “skilled” workers. (Admin. staff).Small firms are subject to regulation starting 2003...... but only those with 15 or more direct workers.

Looks like a whole new regulation even though it’s been in effect since 1959.(e.g. Number of contracts doubled between 2002 and 2003).



Other results

Empirical exercise

Empirical approximation II

To test implication 1 and 2 I estimated (3.1) using plant-level data fromColombia’s Annual Manufacturing Survey, with and without the variables fromstructural labor demands, denoted here by X .

yit = αi +β1Postt +β2I(Nd = 14)∗Postt +β3I(Nd ≥ 15)∗Postt +γXit +µit (3.1)

yit=Total, direct and outsourced labor demand, and ratio of labor types.Postt ≡ I(Year = 2003); X=Controls, include TFP.ITT estimators. Treatment defined in 2002. Data from 2002 and 2003.X=Ratio of outsourced to direct labor, inverse share of managers in totalemployment, the average wage bill, Sector controls, and TFP.



Other results

Empirical exercise

Summary Statistics

Figure: Source: Own calculations using Colombia’s Annual Manufacturing Survey. Table shows summary statistics for firms hiring between 10and 29 directly hired workers in each year. Prices deflated using PPI 2009.



Other results

Empirical exercise

Results I



Other results

Empirical exercise

Results II



Other results

Empirical exercise

Results III



Other results

Wrap up

Other results: Leads and Lags model I

yit = αi + λt +2011∑

τ=1995

βτ I(Nd ≥ 15|τ = 2002)× λτ + µit (4.1)

Model 4.1 formally tests the DD assumption of no difference in trendsprevious to treatment by testing βτ = 0 ∀ τ < 2003.



Other results

Wrap up

Other results: Leads and Lags model II

Figure: Common trends: Total Factor Productivity

Source: EAM 1995-2011. Treatment is defined in 2002.



Other results

Wrap up

Other results: Leads and Lags model III



Other results

Wrap up

Other results: RDD I

Parametric ITT Regression Discontinuity Design.

yij =β0 + β1I(Nd ij ≥ 15|τ = 2002) + β2Ndij + β3N2dij

+ β4I(Nd ij ≥ 15)× Ndij + β5I(Nd ij ≥ 15)× N2dij + µij

(4.2)

Carried out:3 Parametric McCrary (2008).3 Local continuity of baseline covariates: Capital, Materials, Energy

consumption, Firm age.



Other results

Wrap up

Other results: RDD II

Panel C: Total Factor Productivity



Other results

Wrap up

Other results: RDD III

Panel A: Output per worker



Other results

Wrap up

Other results: RDD IV

Panel B: Capital/Labor Ratio



Other results

Wrap up

Discussion I

Size-dependent policies have clear economic costs: ⇓ labor demand,misallocation, ⇓ TFP, labor substitution, segmentation.

They could have benefits as well: ⇑ human capital, school to work transitions,⇑ labor productivity.

This paper studies the costs, which are policy relevant. But the benefitsdeserve attention as well.



Other results

Wrap up

Discussion II

Additional results show positive effects on output per worker and on thecapital to labor ratio.

However it showed negative results on firm TFP.

Along with employment losses, these results are consistent with compulsorytraining having a negative effect on firm performance via misallocation offactors of production.



Other results

Wrap up

Further work

Exploit other features of the regulation and data: Heterogeneous effects acrossmultiple thresholds, industries (Elasticities of substitution).Test quantitative effect of substitution channel on TFP/Output.There appears to be GE effects going on. Close the model for further intuitionabout misallocation and productivity (Another paper).The data suggests firms substitute capital as well (or may invest in labor sav-ing technology). Future research should expand the model to consider thischannel and test its relative importance.Estimate the effect of the apprenticeship share exploiting the multiple thresholddesign. A la Angrist & Lavy (1999), Urquiola & Verhoogen (2009), Pop-Eleches& Urquiola (2013).



Other results

Wrap up

Thank [email protected]

[email protected] latest version of the paper at:

https://sites.google.com/site/spinmetrics/


mailto:[email protected]

mailto:[email protected]

https://sites.google.com/site/spinmetrics/

seminario cede march 3rd 2016

Economy & Finance