Academic journal article New England Economic Review

Investment and Employment by Manufacturing Plants

Academic journal article New England Economic Review

Investment and Employment by Manufacturing Plants

Article excerpt

The preceding article, "The Performance of Traditional Macroeconomic Models of Business Investment Spending," by Richard W. Kopcke, analyzed the determinants of investment at the macro level. However, examination of investment at the macro level encounters several complications. In general, analysis of investment at this degree of aggregation implies that all firms in the economy react similarly to the same macro-level variables. Yet, examining macro data may obscure a great deal of variation in the forces that affect different firms, thus making quantification of the impact of these forces difficult. For example, smaller companies depend more on their proximate sources of funds, such as their own cash flow and loans from the local bank, while large firms have greater access to broader sources of funding, such as the resources of the larger enterprise and funds from the public capital markets. The decisions of smaller companies, therefore, depend more on their own current financial conditions and less on the current macro situation and the cost of capital in public markets, which affect the larger firms. Since different types of firms face an array of different constraints, this article will examine employment and investment at manufacturing plants at a finer level of distinction than was used in the previous article. The disaggregation helps clarify some of the determinants of firm behavior.

The interrelationships of many macro series over the business cycle was the grain of sand that helped create the pearl that is macroeconomics. Figure 1 presents a sampling of these macro series. Employment and investment, as well as prices, bank credit, and national output, all appear to move closely together over the business cycle. In part, this study examines whether the nature of these cycles can be discerned more clearly by examining data for individual manufacturing plants: specifically, whether these cycles are shared across the economy as a whole or only among certain types of firms or firms in certain industries. However, this study explores broader issues besides the cyclical nature of these variables; it distinguishes the determinants of firm behavior that are shared by all types of businesses from those that differ among firms, and it explores whether the potential motives for firms' investment and employment decisions can be more clearly discerned in the data from individual plants. We find that disaggregation sheds light on several important aspects of firm behavior. Not only do different types of plants react directly to business cycle demand shifts in different ways, but these plants react quite differently to some of the indirect effects of business cycles, such as variations in relative wages or in the availability of certain sources of funding.

The first section of the article describes the data used in the analysis. Section II presents the basic empirical model used to examine the plant's choice of labor and capital, showing the results of this model for manufacturing as a whole. The next two sections examine whether further disaggregation of the data into different types of plants helps to clarify some of the determinants of firm investment and employment decisions. The third section discusses the variables that seem to affect all firms in a similar way. This section highlights the issues on which further disaggregation fails to shed much light. The fourth section examines the forces that appear to differ across all types of firms; these results show what may be lost by a simple macro analysis. The final section concludes.

I. The Data

Many of the data used in this study are found in the U.S. Census Bureau's Longitudinal Research Database (LRD), which provides income, employment, and investment variables at an annual frequency for a sample of manufacturing plants across the country Although the importance of manufacturing in the economy has fallen during the past three decades, Figure 2 shows that manufacturing firms are a good laboratory in which to examine the reactions of firms to the forces in a business cycle. …

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