Podcast: How do we deal with firm failure?

My colleague Lachlan Vass came on as a guest to discuss the bailout of the Whyalla Steelworks. The discussion is based on a newsletter article we wrote for e61.

Keen for everyone’s thoughts - we have a bunch of unused material on AI and macrostabilisation that we might throw online later next week if interested! And if people give thoughts it will be easier for me to rope him into this again in the future - which would be amazing.

For those who don’t like to listen, there should be an autogenerated transcript attached :)

I recognise the image looks nothing like us - but when I asked ChatGPT to take our photos and make us do a podcast it was turning Lachlan into a “masculinity” podcaster and made me Santa. So I just asked for a cartoon based on our hair and eyes instead.

Below are the pieces we reference in the discussion:

• e61 research on redundancy and wage losses. [Blogged here.]

• e61 research on the GFC and wage losses. [Blog here.]

• OECD wage scarring and climate change. [Adding the blog post where I discuss this in a wider context for kicks]

• The Treasury career entry scarring piece.

• The “firm effect” research - this wasn’t discussed quite right by me in the podcast. All of the economics, mechanisms, and link to policy were right, I just butchered the discussion of the papers. In doing so I overstated the agreement on firm effects being the main player (although the majority view is that they are).

  • There is an active debate about the significance of firm vs match effects in the literature - the Lachowska paper mentioned is the main paper where match effects dominate and firm effects are unimportant. Listening back I grouped it in the “firm effects dominate” papers while waffling! The other papers mentioned (and the papers discussed in recent work here) find firm effects are very important - but as noted in the podcast there is debate about the mechanisms and role of policy. The recent Woodcock paper is very good on this - so at least I mentioned that!

  • Even if we use the most “firm effects don’t matter” result, the firm premium still accounts for 17% of the loss. Over half of the total loss is instead being captured by “match effects” which are fairly ill defined. For example, if different types of workers are insured against firm failure differently in their pre-job loss wage, this would show up as a “match effect”. If so the policy recommendations are the same as in the firm effect case.

  • Overall, my view is that the description in the podcast was fine and so did not edit - but was keen to provide a full explanation as I fumbled on that paper!