Total Factor Productivity: The Victim of JobPreserving Policies

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Total Factor Productivity The Victim of
Job-Preserving Policies

• Evridiki I. Tsounta
• University of Minnesota

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What is Total Factor Productivity (TFP)?

• Shows how efficiently factors of production are
  used.

• The increase in output that cannot be accounted
  by capital and labor accumulation.

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Example Cobb-Douglas Production Function

• YAK?L?
• A TFP
• Y Output
• K Capital
• L Labor

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Why is TFP important?

• Income disparities across countries cannot be
  explained solely by differences in
• Labor
• Capital
• TFP also matters..

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TFP Mexico and Chile.

• Similar Macroeconomics Conditions (1982)

• Large international debts

• Appreciating real exchange rates

• Weak financial systems

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Mexican and Chilean TFP(1980-2000)
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Looking at the graphs.

• Understand GDP behavior
• Understand TFP behavior

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Mexican and Chilean TFP(1980-2000)TFP decline
and financial crisis
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Mexican and Chilean TFP(1980 - 2000)Different
TFP Recovery Paths
WHY?
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Questions

• Why a TFP drop was associated with financial
  crises in Chile and Mexico?

• Why TFP recovery paths were different?

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Question 1 Why TFP dropped after the financial
crises in Chile and Mexico?

• My hypothesis
• Job-preserving subsidized-loans were the reason
  for the fall in TFP after the financial crises!

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After a financial crisis

• Financial Sector is vulnerable
• Firm closures might happen
• Jobs might be lost

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• Nationalize the financial intermediation system
• Allocate loans (at subsidized rates) to
  inefficient firms in order to preserve jobs

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What does that mean?

• Many inefficient firms survive
• Factors of production are used by inefficient
  firms

TFP falls..
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Question 2 Why TFP recovered in Chile but not in
Mexico after 1985?
Each country used different finance policies..
.policies related to the allocation of capital
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Mexico
Chile

• No Reforms
• Nationalized financial system

• Reforms
• Sound, Competitive
• Financial System

• Loans allocated based on economic merit

• Loans allocated based on political criteria

• Market Interest rates

• Below-market interest
• rates

• Inefficient firms close down

• Inefficient firms survive

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Thus.

• TFP recovered in Chile
• TFP did not recover in Mexico

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Goal

• Theoretical mechanism that shows
• finance policies to preserve jobs
• adversely affect TFP

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Stationary Equilibrium Analysis

• Compare steady states in economy under
• two policies
• Capital allocated based on
• Economic Criteria
• Market interest rates
• Political criteria
• Below market interest rates to inefficient firms
• Conditional on hiring some number of workers

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Steady State.

• Variables are constant across periods
• Examples
• Consumption
• Employment
• Capital
• Number of Firms

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Firms

• Heterogeneous

• Entry and Exit of Firms

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Two Policies Loans allocated based on
Economic Criteria
Political Criteria

• Inefficient Firms Exit

• Inefficient Firms Operate

• Large number of efficient new entrants

• Small number of efficient new entrants

• Resources are used efficiently

• Resources are used inefficiently

• TFP is high

• TFP is low

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Numerical Experiments

• Subsidies in financial sector, to preserve jobs
  lower TFP
• Subsidies ( of GDP) Decrease in
  TFP
• 2.8
  5.0
• 7.5
  13.7

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Driving forces for TFP decline

• 1. Not letting inefficient firms fail
• 2. Resources used inefficiently

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• The model.

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Economy with Subsidized Capital

• Objective Preserve jobs
• Loan officer decides
• Whether firm is subsidized
• Subsidy offer
• Note Offers are only made to firms that would
  have exited, without a subsidy.

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The Subsidy Offer

• If type bad firm
• Hires at least n
• Rents k units of capital
• At rate r ltrm
• Subsidy (rm-r )k
• rm market interest rate
• r subsidized rate

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Note A constraint facing the loan officer is
that offers, if made, must be such that the firm
will accept it
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Loan Officers Problem

• Decides whether or not to make a subsidy offer
• Will firm closed down, if not subsidized
• Will (benefit gt cost) from subsidizing?
• If offer made, decides which one

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• Benefit from Subsidy

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Cost of Subsidy

• (rm - r )k

• r subsidized interest rate
• rm market interest rate
• k subsidized capital

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Offer subsidy?

• Subsidy offered if
• Benefit Cost
• Subsidy NOT offered if
• Benefit lt Cost

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Types of Firms

• Subsidized
• Operate - Not-subsidized
• Exit

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Economy without Subsidies

• No loan Officer
• Two types of firms
• Firms that exit
• Firms that operate

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Numerical Experiment

• Two types of firms high and low productivity
• Without Subsidies
• Only the high productivity firms operate
• With Subsidies
• Low productivity firms are subsidized

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Steady States
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What have we learned?

• Job Preserving Policies do increase employment
• Large TFP cost

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Monotonicity Result
The higher the political pressure to preserve
jobs the higher the fall in TFP.
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Question 1 Why TFP fell after the 1982 crises in
Chile and Mexico?

• Nationalized the financial system
• Allocated loans based on political criteria
• Inefficient firms survived

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Question 2 Why different recovery paths?
Different finance policies
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Policy Implications..

• Job Preserving policies might increase employment
• Economy is not producing the maximum possible

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What to do.

• Allow inefficient firms to close down
• People that lose their jobs are protected by
  government benefitsuntil new jobs are created
• Economy is not hurt.

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Mexican and Chilean TFP(1980-2000)
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Chile and Mexico

• Need financial system free from politics
• Firm failures is part of risk-taking behavior in
  a competitive environment.

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No only Chile and Mexico..
Sweden and Japan

• Financial crises in early 1990s
• Real estate bubble
• Reckless lending
• What was the reaction?

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Sweden

• Restructuring of the financial sector
• Bank Support Authority not influenced by
  politics.

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Japan

• Banks faced growing pressures from government
  entities (Financial Supervisory Agency) to
  continue lending to troubled firms in order to
  avoid
• Credit crunch
• Sharp increases in unemployment rate
• Firm bankruptcies

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What was the outcome?

• Sweden (1994-onwards)
• ECONOMIC GROWTH
• Japan
• STAGNATION

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Can TFP be the victim of job-preserving policies?

• Mexico/ Japan
• Not allow inefficient firms to close down
• Allocated loans based on political criteria
• Large TFP Decline
• Chile /Sweden
• Allowed inefficient firms to close down
• Allocated loans based on economic criteria
• TFP Recovery