Tuesday, September 9, 2014

9/9/2014: Creative Destruction and Individual Well-Being

Here's a very interesting paper by Philippe Aghion, Ufuk Akcigit, Angus Deaton, and Alexandra Roulet, titled "Creative Destruction and Subjective Well-Being" (April 7, 2014, http://isites.harvard.edu/fs/docs/icb.topic1259555.files/Papers%20Spring%202014/AGHION%20April%202014.pdf)

The paper looks at "the effect of Schumpeterian creative destruction on subjective well-being. We
highlight theoretically the two opposite forces that creative destruction has on well-being: a negative
force through the higher risk of displacement and a positive one through higher growth expectations."

The displacement comes from the entry by an 'innovator' that displaces currently employed worker(s). The new technology is only enabled when a new worker is hired, and this results in higher output thereafter. So "more turnover translates into a higher probability of becoming unemployed which in turn reduces life satisfaction". But higher turnover means higher growth and this implies higher future earnings which "enhances life satisfaction."

Beyond this, the authors distinguish two types of workers, and as the result derive two different net effects.
"A second prediction is that higher turnover has a less positive (or more negative) effect on life satisfaction for more risk-averse individuals."

Applying the model to data, "Empirically, we find evidence supporting the existence of these two effects. We measure subjective well-being … [and] also use a measure reflecting individuals’ current ”worry”. For creative destruction we use establishment and job turnover following Davis et al (1996). The turnover data are MSA-level panel data from the Business Dynamics Statistics."

In more details: "We find that the effect of creative destruction on life satisfaction is unambiguously positive when we control for MSA level unemployment, less so when we do not. The magnitude of the effect is similar than that of the unemployment rate (but of opposite sign) and stronger when focusing on anticipated well-being (the growth expectation effect); yet creative destruction is also associated with increased worry (the displacement risk effect). Consistent with our model, we also find that creative destruction has a more positive effect on life satisfaction in states with a more generous unemployment insurance policy."

Note: Thanks to Liam Delaney for spotting this one earlier on twitter.

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