Abstract
This paper compares labor market flows between a developing economy, Colombia, and a developed one, the United States (US). In a comparative framework, we explore measures of labor market flows across dimensions such as firm size, age, and economic sector. This comparison allows us testing, for both countries, a series of interesting hypothesis suggested in the literature, namely the negative systematic relationship between firm size/age and employment growth rate. We find that labor market fluidity in the US labor market is substantially higher than in Colombia and that the churning rate is twice as high for the US market as it is for the Colombian one. We argue that this fluidity gap between the two economies can be explained by, among other factors, the rigid nature of Colombian labour market institutions.
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Notes
Nevertheless, literature has noted undesirable effects of increasing fluidity. For example, the job losses implicit in worker replacements can lead to lower job security and might increase the incidence of unemployment (Davis and Haltiwanger 2014). From the perspective of the firm, excess of worker turnover increases training costs, and therefore might be damaging to the employer (Burgess et al. 2000).
PILA statistics are available starting in 2008; however, to avoid measurement errors we use information reported since 2009.
Unfortunately, with PILA we are not able to identify the number of plants or establishments that constitute a firm.
Given the information from PILA used in this paper, we are able to follow the change in the number of workers by firm. This measure includes full-time and part-time workers (i.e., workers who contribute to the pension or health system).
With this construction, using quarterly data, we lose some information compared to the monthly frequency. We find that the difference between quarterly and monthly formal employees is around 2 million, which in PILA represents around 21.5% of the total employment in 2017 (average total employment from January to September). Using the Job Openings and Labor Turnover Survey (JOLTS), Davis et al. (2006) find that, for the US, the quarterly flow rates (and) are on average 2.6 times the monthly ones. In the case of Colombia, we find that this ratio is 1.7. Even though very short job spells are important for the Colombian case, the dynamics of the labor flows at monthly and quarterly measures are very similar.
The public sector represents, on average, 24.14% of the total employment reported in PILA during the whole period analyzed.
The QWI uses the physical location where production takes place as a unit of analysis. Retrieved from https://lehd.ces.census.gov/data/qwi_national_beta.html#downloadable-data
Definitions and notation used in this section carefully follow Morales and Medina (2016).
By different categories, we mean different firm sizes, ages, and economic sectors.
Theoretically, these flows can be generated from traditional equilibrium unemployment models. These models, which were introduced by Mortensen and Pissarides (1994) and by Pissarides (2000), first reproduce the search processes that workers enact when they want to find a job or that firms initiate when they want to fill a vacancy. Then, they focus on how jobs are created and destroyed by the firms, and how workers move from being employed to unemployed. Together, these dynamics flows determine the equilibrium unemployment rate.
As reported in Morales and Medina (2019), the proportion of all fluidity explained by very small firms is tiny; they argue that firms with two to five employees represent only 1.09% of total worker flow, 3.57% of churning flow, and 5.87% of total job flow.
Morales et al. (2019) show that the formal market has considerably higher magnitudes of worker reallocation rates and churning rates than the informal share of the market.
All of these measures are expressed as a percentage of the total employment; therefore, during an average quarter, separations and hires represent 20% and 21% of total employment in US, respectively.
The average indicators of the OECD countries allow us to compared Colombia case with a benchmark for all developed economies.
Figure 4 presents a comparison of employment protection legislation in terms of OECD indicators; these are synthetic indexes that measure the costs associated with worker dismissal (including notice periods, severance payments, and difficulty of the process).
Blanchard and Portugal (2001) present a theoretical model that relates employment protection regulation and labor flows, according to the traditional models of Mortensen and Pissarides (1994), with endogenous job destruction. The authors show that high employment protection lowers layoffs (worker flows) because it increases the firm costs while strengthening the bargaining power of workers, but also produces longer unemployment duration. They find that high employment protection explains the lower labor flows in Portugal compared to the United States.
As explained in Koske et al. (2015), barriers to entrepreneurship are measured using licenses and permits, communication, and simplification of rules and procedures. Administrative burdens on startups are measured using administrative burdens of corporations and barriers in service sectors. Barriers to FDI are measured using information on approval mechanisms, restrictions on the employment of foreigners as key personnel, and operational restrictions.
The size distribution fallacy arises when firms migrate between size categories from one year to the next. Regression fallacy occurs when employers experience transitory fluctuations in size and when there is a strong relationship between the reclassification of the firm and transitory changes in employment. See Davis et al. (1996b), p. 305.
Dynamic classification attributes a firm’s job creation or loss to the size class to which the firm belongs at the moment job creation or loss actually occurs, not to a single size class as with other methods. See De Wit and De Kok (2014), p. 285.
In an extended version of this paper, we calculated the flows using the average plant size of the number of employees for the firm (quarterly) during the whole period. As we showed in that version, the results are very similar (Flórez et al. 2017).
In 2013, Colombia implemented a tax reform, which importantly reduces payroll taxes. This reform affected all firms with at least two employees; nevertheless, there is some evidence that the reform had the highest impact on the largest firms (Morales and Medina 2017). The reduction on churning in firms with 500 employees or more from 2015 on might be a delayed effect of the reform. As we discuss in Section 4 of this paper, the reform plausibly had a positive impact on WR and JR, but higher of the former than the later; in situations like these, churning reductions are expected, since churning is the difference between WR and JR.
To build these groups, we aggregated some sectors as follows: Agriculture and Mining includes agriculture, forestry, fishing, and mining; Transportation and Trade includes transportation, warehousing, information, trade, hotels, and food; Private Services includes real state, rental, leasing, and finance. For Colombia, we referred to the Clasificación Industrial Internacional Uniforme (Spanish acronym: CIIU), also known as the International Standard Industrial Classification (ISIC). For the US we referred to the QWI, which uses the industry categories defined by the North American Industry Classification System (NAICS).
Because QWI data does not give access to information at the establishment level, we were unable to perform a similar regression for the US case.
For firm size, we used the annual average measure, which presents variation across time.
We compute for each month MWC, this the extra-cost of the payroll due to increments in the minimum wage, keeping hours fixed; in the regressions, we average the MWC by year; nevertheless, results do not change if we use the monthly MWC, or the average of the last quarter of the year. In additional exercises, we use the ratio of the real minimum wage to median wage, instead of the MWC as a measure of rigidity; results are similar to the ones obtained with the MWC. These results will be provided by request.
We use the lag of the payroll because for some of our independent variables, as the employment growth rate, using payroll contemporaneously would cause a problem of reverse causality; this because the contemporaneous employment would show up in the dependent and independent variables.
In Colombia, the minimum wage is determined by a bargaining between economic guilds and unions, where the government is an intermediary. In the case that firms and workers cannot agree, the Government determines the policy.
The low within R squared suggests that the within transformation of the covariates explains little of the variation in labor market flows. As noted by Burgess et al. (2000), the idiosyncratic unobserved firm-specific fixed effect is very important in the explanation of labor flows. Those authors explain these results as a consequence of a particular recruiting policy that is persistent and sustainable across time; however, the interesting questions thus raised about optimal recruiting decisions are beyond the scope of this paper.
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We thank Leidy Gómez for her excellent research assistance, Blendi Kajsiu and two anonymous reviewers for their helpful comments and suggestions.
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Flórez, L.A., Morales, L.F., Medina, D. et al. Labor flows across firm size, age, and economic sector in Colombia vs. the United States. Small Bus Econ 57, 1569–1600 (2021). https://doi.org/10.1007/s11187-020-00362-8
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DOI: https://doi.org/10.1007/s11187-020-00362-8