CHANGING THE METHOD OF PAY: Survival in a Collapsing Market 3

Posted by Kathryn Schwartz on February 09, 2015

Given the huge decline in the number of establishments, changes in employment have occurred almost exclusively by plant closures. The upper panel of Table 4 shows that the fall in employment due to closures account for over 100% of the 1967-1992 and 1972-1992 falls in employment. Entry of new plants brought some jobs into the industry, whereas declines in employment within firms have made only a modest impact on total employment. The lower panel of the table shows that the firms that left the industry had lower productivity and higher shares of labor in cost than those that survived, while the new entrants had lower productivity and higher labor’s shares in 1992.

Underlying the averages in Table 4 is a wide range of variation in labor input coefficients or productivity among establishments. Figure 1A shows the distribution of productivity in shoe firms in 1967 and in 1992 and gives sales per employee-hour worked and hourly earnings for “best practice” firms (those at the upper decile of the productivity distribution or wage distribution); “worst practice” firms (those at the bottom decile of the productivity or wage distribution), and the mean for the firms.

Consistent with the Salter model, there is huge variation in the productivity—sine qua non for an analysis that makes entry and exit conditions critical factors in how an industry adjusts to changing market conditions. Some of the variation in productivity is due to different technologies and vintages, per the Salter model: even within a technologically stable industry, there are different techniques for production. Some of the variation is also due, however, to the variation in products within the SIC sector: some firms produce high-quality items or specialty products, like cowboy boots or moccasins; while others compete more directly with low-priced imports.

Initially, we anticipated that the dispersion of productivity among firms would decline, as the low productivity firms would be pushed out of the market. In fact, the opposite seems to have occurred. The top decile of firms nearly doubled their productivity while productivity in the bottom decile actually fell. How could this be?

One factor that permitted low productivity firms to remain in business is the fall of real earnings among low paid American workers. Figure IB shows considerable variation in hourly earnings of production worker in the shoe sector and, what is perhaps more striking, increases in earnings inequality among establishments. From 1967 to 1992, hourly pay actually increases for workers in the highest paying decile of firms, while hourly pay drops by 13 percent for the median firm and by 24% for the lowest decile of firms. To some extent the wider dispersion in productivity was sustained by the widening distribution of wages in the industry.

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