Is the German labour market granular?

ABSTRACT

This paper is the first to investigate the relevance of the ‘granular hypothesis” proposed by Gabaix (Econometrica 2011) for employment growth. Using comprehensive data for Germany, we show that the establishment size distribution in terms of employment is indeed fat-tailed and that idiosyncratic shocks to large establishments explain a substantial portion of aggregate employment change. This relationship is more pronounced in the manufacturing than the service sector. Our findings may be an argument for stabilizing the largest establishments when hit by negative idiosyncratic shocks, since their employment fluctuations could spill over to aggregate employment growth.

KEYWORDS:

• Idiosyncratic shocks
• granular residual
• employment
• administrative data

JEL CLASSIFICATION:

• E24
• E32

Acknowledgments

The authors would like to thank Hermann Gartner, Christian Hutter, and Christian Merkl as well as an editor and two reviewers of this journal for helpful comments and suggestions.

Data availability statement:

The Administrative Wage and Labor Market Flow Panel (AWFP) is a dataset on labor market flows and stocks for the universe of German establishments covering the years 1975–2014. The main data source of the AWFP data is the Employment History (Beschäftigten-Historik) of the Institute for Employment Research (IAB). Since the AWFP contains aggregated social security data at the establishment level, it cannot be made available in a data repository.

However, the Research Data Centre (FDZ) of the German Federal Employment Agency (BA) at the IAB provides the FDZ Sample of the AWFP (FDZ-AWFP). The FDZ-AWFP contains selected AWFP variables for a 50% random sample of establishments for the years 1976–2014. It is accessible via on-site use at the FDZ and remote data access. For further information on the FDZ-AWFP and data access please refer to its FDZ website.

For replication purposes, the entire AWFP as used in this paper can be accessed on-site at the FDZ of the IAB https://fdz.iab.de/en/FDZ_Establishment_Data/FDZ-AWFP.aspx.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The establishments’ i employment growth rate for period t is calculate as: $\frac{N_{it}-N_{it-1}}{(N_{it}+N_{it-1})/2}$. It allows the inclusion of newly founded and closed establishments. The rate is bounded to [−2,2]; see Davis, Haltiwanger, and Schuh (1996) for a thorough discussion of these rates. To cope with outliers (e.g., due to shutdowns or mergers of establishments) we winsorize the establishment growth rates with the 10^th and 90^th percentile of the growth rates of all establishments in all periods. Our main implications are not sensitive to this choice.

² Appendix A2 provides more information on the concept of labour market granularity and Appendix A3 on our estimation approach.

³ Note that our insights do not change if we control for the lagged growth rate of wages and the lagged share of high-qualified workers at the micro-level regression, include part-time workers in our estimations, add a lagged dependent variable, increase the lag length to eight, or take account of potential residual autocorrelation by employing the Newey-West estimator (results available on request).

⁴ The Research Data Centre (FDZ) of the German Federal Employment Agency (BA) at the IAB provides a 50% random sample of establishments for the years 1976–2014 (Stüber and Seth, 2019a) and aggregated public release datasets (Stüber and Seth, 2019b).

⁵ The rate is bounded to [-2,2]; see Davis, Haltiwanger, and Schuh (1996) for a thorough discussion of these rates.

Additional information

Funding

Heiko Stüber gratefully acknowledges support by the German Research Foundation (DFG) under priority program ‘The German Labor Market in a Globalized World’ (SPP 1764) under grant STU 627/1-2.