Who Creates Jobs? Estimating Job Creation Rates at the Firm Level
University of Salzburg, Economics and Finance Working Paper No. 2013-05
31 Pages Posted: 31 Aug 2012 Last revised: 15 Nov 2013
Date Written: November 15, 2013
This paper analyzes econometric models of the Davis, Haltiwanger and Schuh (1996) job creation rate. In line with the most recent job creation literature, we focus on employment-weighted OLS estimation. Our main theoretical result reveals that employment-weighted OLS estimation of DHS job creation rate models provides biased marginal effects estimates. The reason for this is that by definition, the error terms for entering and exiting firms are non-stochastic and non-zero. This violates the crucial mean independence assumption requiring that the conditional expectation of the errors is zero for all firms. Consequently, we argue that firm entries and exits should be analyzed with separate econometric models and propose alternative maximum likelihood estimators which are easy to implement. A small-scale Monte Carlo analysis and an empirical exercise using the population of Austrian firms point to the relevance of our analytical findings.
Keywords: DHS job creation rate; firm size; firm age; maximum likelihood estimation; three-part model; multi-part model; Monte Carlo simulation
JEL Classification: C18; C53; D22; E24; L25; L26; M13
Suggested Citation: Suggested Citation