Firm Dynamics and Employment Outcomes

The group “Firm Dynamics and Employment Outcomes” analyses the foundation, evolution, and failure of firms, and subsequent consequences for individuals and regions. The group works on research questions around firm behaviour to explain recent phenomena such as business dynamism slowdown and wage inequality.

A central question to understand firm dynamism, mobility, innovation and the process of creative destruction is on the role of government interference. In this respect, the team analyses how connections of firms to politicians shape the business environment and to what extent firms benefit from having a political connection. 

At the firm level, the group studies performance measures such as employment, sales, and market exit and investigates public procurement contracts, subsidies and political initiatives in terms of law proposals and draft laws that implicitly may generate higher entry barriers and distorts competition. This research will be informative for the overall economic environment and economic prosperity.

The way economies generate economic prosperity is central to our understanding of social mobility and welfare. Over the last three decades, Germany and the United States have shown similar productivity improvements. The way these improvements have been generated, however, differ remarkably. While startups in the United States are well-known for their innovation and radical advancements, the German business model relies to a large extent on established incumbent firms in the process of innovation and new technologies. The research group considers empirically and theoretically the role of entrepreneurship in this process and how it differs between Germany and the United States.

Understanding firm behaviour and the role of firms in our society contributes to the political and academic discussion on wage inequality and regional disparities. The sorting process of high productive workers into high productive firms has amplified over the last three decades with important implications for wages and aggregate inequality. Thus, the group examines the consequences of wage inequality between firms and to what extent selective mobility contributes to wage disparities. 

The research group “Firm Dynamics and Employment Outcomes” further studies implications of innovative activities in the form of patenting on within-firm wage inequality. Examining impacts of new technologies and worker-level consequences will be informative about winners and losers in our society and informs policy makers on how to take action in terms of reskilling certain groups of the workforce.

The research group makes use of various administrative, survey and hand-collected data. The Establishment History Panel (BHP) provided by the Institute for Employment Research (IAB) and the Mannheim Enterprise Panel (MUP) provided by the Leibniz Centre for European Economic Research (ZEW) provide firm-level information on the performance of firms over time. At the individual level, IAB’s Integrated Employment Biographies (IEB) allows to study regional and wage mobility patterns of workers. European Patent Office data provide the basis for patenting activities. Web-scraped and survey data on political activities and opinions are exploited to study differential behaviour of politicians in parliament.

Workpackage 1: Business Dynamism, Firm Performance and Political Connections

Workpackage 2: Wage Inequality, Innovation and Firms

Workpackage 3: Shades of Capitalism: The Role of Entrepreneurship for Innovation and Business Dynamism in Germany and the United States

Research Cluster
Productivity and Institutions

Your contact

Dr André Diegmann
Dr André Diegmann
- Department Structural Change and Productivity
Send Message +49 345 7753-873 Personal page

EXTERNAL FUNDING

01.2020 ‐ 06.2024

The Rise of Populist Parties in Europe: The Dark Side of Globalization and Technological Change?

VolkswagenStiftung

Globalisation may have increased prosperity in general, but has also led to unemployment, wage inequality, outward migration and, thus, ageing populations in many European regions. This project examines whether these economic burdens lead to votes for populist parties.

see project's webpage

Professor Dr Steffen Müller

01.2019 ‐ 06.2022

MICROPROD („Raising EU Productivity: Lessons from Improved Micro Data“)

Europäische Kommission

The goal of MICROPROD is to contribute to a greater understanding of the challenges brought about in Europe by the fourth industrial revolution and the associated ‘productivity puzzle’ in a context of globalisation and digitisation, and to provide alternative policy options to better address these challenges.

see project's webpage

This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 764810.

Professor Dr Steffen Müller

07.2018 ‐ 12.2020

Firm Wage Differentials in Imperfect Labour Markets: The Role of Market Power and Industrial Relations in Rent Splitting between Workers and Firms

German Research Foundation (DFG)

The main purpose of this proposal is to grasp a firmer understanding of how employment rents are split between workers and employers in imperfect labour markets and how labour market institutions, such as unions and works councils, influence the distribution of rents. In that it not only promises new insights into the wage formation process and the likely consequences of important labour market trends like falling unionisation and worker codetermination, but also promises to inform important public policy debates, such as which rights should be granted to organised labour.

see project's page on DFG website

Professor Dr Steffen Müller

02.2019 ‐ 09.2019

Evaluation of the IAB Establishment Panel 2018 and Preparation of a Results Report for West and East Germany

Final report: Fehlende Fachkräfte in Deutschland – Unterschiede in den Betrieben und mögliche Erklärungsfaktoren: Ergebnisse aus dem IAB-Betriebspanel 2018. IAB-Forschungsbericht 10/2019. (in German, English abstract available)

Dr Eva Dettmann

04.2016 ‐ 03.2019

Wage and Employment Effects of Bankruptcies

German Research Foundation (DFG)

The project analyzes the process and the consequences of firm failure. For the first time, evidence on the consequences of small firms’ bankruptcy on employees’ earnings and wages is provided. The project e.g. shows that employees of small firms are more likely to see their employer failing but, at the same time, face smaller earnings and wage losses than employees displaced from larger firms. Check the below research articles for further insights.

Overview of project results (in German)     Project website

Professor Dr Steffen Müller
Dr Daniel Fackler
Dr Jens Stegmaier

01.2018 ‐ 12.2018

Evaluation of the IAB Establishment Panel 2017 and Preparation of a Results Report for West and East Germany

Final report: Lohnunterschiede zwischen Betrieben in Ost- und Westdeutschland: Ausmaß und mögliche Erklärungsfaktoren. Ergebnisse aus dem IAB-Betriebspanel 2017. IAB-Forschungsbericht 6/2018. (in German, English abstract available)

Professor Dr Steffen Müller

01.2017 ‐ 09.2017

Evaluation of the IAB Establishment Panel 2016 and Preparation of a Results Report for West and East Germany

Final report: Produktivitätsunterschiede zwischen West- und Ostdeutschland und mögliche Erklärungsfaktoren. Ergebnisse aus dem IAB-Betriebspanel 2016. IAB-Forschungsbericht 16/2017. (in German, English abstract available)

Professor Dr Steffen Müller

Refereed Publications

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Works Councils and Other Plant-specific Forms of Employee Participation – Substitutes or Complements?

Stefan Ertelt Boris Hirsch Claus Schnabel

in: Industrielle Beziehungen, No. 3, 2017

Abstract

Der Beitrag untersucht anhand des IAB-Betriebspanels (2004-2013) die Verbreitung, Entwicklung und Interdependenz von Betriebsräten und anderen, meist betriebsinitiierten Formen der Mitarbeitervertretung (wie z.B. Runde Tische). In der Privatwirtschaft sind Betriebsräte gleich häufig zu finden wie andere Mitarbeitervertretungen, doch kommt eine gleichzeitige Existenz beider Gremien in einem Betrieb kaum vor. Ökonometrische Analysen mit rekursiven Probit-Modellen verdeutlichen, dass z.T. unterschiedliche Faktoren das Vorhandensein dieser alternativen Formen der Mitarbeitervertretung erklären und dass bezüglich ihrer Existenz, Gründung und Auflösung Betriebsräte und andere Mitarbeitervertretungen negativ miteinander korrelieren. Dies deutet darauf hin, dass zwischen beiden Formen der Arbeitnehmerpartizipation eine überwiegend substitutive Beziehung besteht.

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The Dynamic Effects of Works Councils on Plant Productivity: First Evidence from Panel Data

Steffen Müller Jens Stegmaier

in: British Journal of Industrial Relations, No. 2, 2017

Abstract

We estimate dynamic effects of works councils on labour productivity using newly available information from West German establishment panel data. Conditioning on plant fixed effects and control variables, we find negative productivity effects during the first five years after council introduction but a steady and substantial increase in the councils’ productivity effect thereafter. Our findings support a causal interpretation for the positive correlation between council existence and plant productivity that has been frequently reported in previous studies.

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Transferability of Skills across Sectors and Heterogeneous Displacement Costs

Moises Yi Steffen Müller Jens Stegmaier

in: American Economic Review: Papers and Proceedings, No. 5, 2017

Abstract

We use rich German administrative data to estimate new measures of skill transferability between manufacturing and other sectors. These measures capture the value of workers' human capital when applied in different sectors and are directly related to workers' displacement costs. We estimate these transferability measures using a selection correction model, which addresses workers' endogenous mobility, and a novel selection instrument based on the social network of workers. Our results indicate substantial heterogeneity in how workers can transfer their skills when they move across sectors, which implies heterogeneous displacement costs that depend on the sector to which workers reallocate.

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Paternal Unemployment During Childhood: Causal Effects on Youth Worklessness and Educational Attainment

Steffen Müller Regina T. Riphahn Caroline Schwientek

in: Oxford Economic Papers, No. 1, 2017

Abstract

Using long-running data from the German Socio-Economic Panel (1984–2012), we investigate the impact of paternal unemployment on child labour market and education outcomes. We first describe correlation patterns and then use sibling fixed effects and the Gottschalk (1996) method to identify the causal effects of paternal unemployment. We find different patterns for sons and daughters. Paternal unemployment does not seem to causally affect the outcomes of sons. In contrast, it increases both daughters’ worklessness and educational attainment. We test the robustness of the results and explore potential explanations.

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Gender Wage Discrimination: Does the Extent of Competition in Labor Markets Explain why Female Workers are Paid Less than Men?

Boris Hirsch

in: IZA World of Labor, No. 310, 2016

Abstract

There are pronounced and persistent wage differences between men and women in all parts of the world. A significant element of these wage disparities can be attributed to differences in worker and workplace characteristics, which are likely to mirror differences in worker productivity. However, a large part of these differences remains unexplained, and it is common to attribute them to discrimination by the employer that is rooted in prejudice against female workers. Yet recent empirical evidence suggests that, to a large extent, the gaps reflect “monopsonistic” wage discrimination—that is, employers exploiting their wage-setting power over women—rather than any sort of prejudice.

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Working Papers

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The Distribution of National Income in Germany, 1992-2019

Stefan Bach Charlotte Bartels Theresa Neef

in: IWH Discussion Papers, No. 25, 2024

Abstract

<p>This paper analyzes the distribution and composition of pre-tax national income in Germany since 1992, combining personal income tax returns, household survey data, and national accounts. Inequality rose from the 1990s to the late 2000s due to falling labor incomes among the bottom 50% and rising incomes in the top 10%. This trend reversed after 2007 as labor incomes across the bottom 90% increased. The top 1% income share, dominated by business income, remained relatively stable between 1992 and 2019. A large share of Germany’s top 1% earners are non-corporate business owners in labor-intensive professions. At least half of the business owners in P99-99.9 and a quarter in the top 0.1% operate firms in professional services – a pattern mirroring the United States. From 1992 to 2019, Germany’s top 0.1% income concentration exceeded France’s and matched U.S. levels until the late 2000s.</p>

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Do Politicians Affect Firm Outcomes? Evidence from Connections to the German Federal Parliament

André Diegmann Laura Pohlan Andrea Weber

in: IWH Discussion Papers, No. 15, 2024

Abstract

<p>We study how connections to German federal parliamentarians affect firm dynamics by constructing a novel dataset linking politicians and election candidates to the universe of firms. To identify the causal effect of access to political power, we exploit (i) new appointments to the company leadership team and (ii) discontinuities around the marginal seat of party election lists. Our results reveal that connections lead to reductions in firm exits, gradual increases in employment growth without improvements in productivity. Adding information on credit ratings, subsidies and procurement contracts allows us to distinguish between mechanisms driving the effects over the politician’s career.</p>

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Income Shocks, Political Support and Voting Behaviour

Richard Upward Peter Wright

in: IWH Discussion Papers, No. 1, 2024

Abstract

We provide new evidence on the effects of economic shocks on political support, voting behaviour and political opinions over the last 25 years. We exploit a sudden, large and long-lasting shock in the form of job loss and trace out its impact on individual political outcomes for up to 10 years after the event. The availability of detailed information on households before and after the job loss event allows us to reweight a comparison group to closely mimic the job losers in terms of their observable characteristics, pre-existing political support and voting behaviour. We find consistent, long-lasting but quantitatively small effects on support and votes for the incumbent party, and short-lived effects on political engagement. We find limited impact on the support for fringe or populist parties. In the context of Brexit, opposition to the EU was much higher amongst those who lost their jobs, but this was largely due to pre-existing differences which were not exacerbated by the job loss event itself.

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Safety Net or Helping Hand? The Effect of Job Search Assistance and Compensation on Displaced Workers

Daniel Fackler Jens Stegmaier Richard Upward

in: IWH Discussion Papers, No. 18, 2023

Abstract

We provide the first systematic evidence on the effectiveness of a contested policy in Germany to help displaced workers. So-called “transfer companies” (<i>Transfergesellschaften</i>) employ displaced workers for a fixed period, during which time workers are provided with job-search assistance and are paid a wage which is a substantial fraction of their pre-displacement wage. Using rich and accurate data on workers’ employment patterns before and after displacement, we compare the earnings and employment outcomes of displaced workers who entered transfer companies with those that did not. Workers can choose whether or not to accept a position in a transfer company, and therefore we use the availability of a transfer company at the establishment level as an IV in a model of one-sided compliance. Using an event study, we find that workers who enter a transfer company have significantly worse post-displacement outcomes, but we show that this is likely to be the result of negative selection: workers who lack good outside opportunities are more likely to choose to enter the transfer company. In contrast, ITT and IV estimates indicate that the use of a transfer company has a positive and significant effect on employment rates five years after job loss, but no significant effect on earnings. In addition, the transfer company provides significant additional compensation to displaced workers in the first 12 months after job loss.

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Committing to Grow: Employment Targets and Firm Dynamics

Ufuk Akcigit Harun Alp André Diegmann Nicolas Serrano-Velarde

in: IWH Discussion Papers, No. 17, 2023

Abstract

<p>We examine effects of government-imposed employment targets on firm behavior. Theoretically, such policies create “polarization,“ causing low-productivity firms to exit the market while others temporarily distort their employment upward. Dynamically, firms are incentivized to improve productivity to meet targets. Using novel data from East German firms post-privatization, we find that firms with binding employment targets experienced 25% higher annual employment growth, a 1.1% higher annual exit probability, and 10% higher annual productivity growth over the target period. Structural estimates reveal substantial misallocation of labor across firms and that subsidizing productivity growth would yield twice the long term increases in employment.</p>

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