EFJK Growth

February 26, 2015
Ufuk Akcigit of University of Pennsylvania and Benjamin Moll of Princeton University, Organizers

Loukas Karabarbounis and Brent Neiman, University of Chicago and NBER

Capital Depreciation and Labor Shares Around the World: Measurement and Implications (NBER Working Paper 20606)

The labor share is typically measured as compensation to labor relative to gross value added ("gross labor share"), in part because gross value added is more directly measured than net value added. Labor compensation relative to net value added ("net labor share") may be more important in some settings, however, because depreciation is not consumed. In this paper, Karabarbounis and Neiman make three contributions. First, they document that gross and net labor shares generally declined together in most countries around the world over the past four decades. Second, they use a simple economic environment to show that declines in the price of capital necessarily cause gross and net labor shares to move in the same direction, whereas other shocks such as a decline in the real interest rate may cause the net labor share to rise when the gross labor share falls. Third, the researchers illustrate that whether the gross or the net labor share is a more useful proxy for inequality during an economy's transition depends sensitively on the nature of the underlying shocks that hit the economy.

Vasco M. Carvalho, CREI, and Nico Voigtläender, University of California, Los Angeles and NBER

Input Diffusion and the Evolution of Production Networks

What determines which inputs are initially considered and eventually adopted in the production of new or improved goods? Why are some inputs much more prominent than others? Carvalho and Voigtländer model the evolution of input linkages as a process where new producers first search for potentially useful inputs and then decide which ones to adopt. A new product initially draws a set of 'essential suppliers'. The search stage is then confined to the network neighborhood of the latter, i.e., to the inputs used by the essential suppliers. The adoption decision is driven by a tradeoff between the benefits accruing from input variety and the costs of input adoption. This has important implications for the number of forward linkages that a product (input variety) develops over time. Input diffusion is fostered by network centrality – an input that is initially represented in many network neighborhoods is subsequently more likely to be adopted. This mechanism also delivers a power law distribution of forward linkages. The researchers' predictions continue to hold when varieties are aggregated into sectors. They can thus test them, using detailed sectoral U.S. input-output tables. The authors show that initial network proximity of a sector in 1967 significantly increases the likelihood of adoption throughout the subsequent four decades. The same is true for rapid productivity growth in an input-producing sector. The empirical results highlight two conditions for new products to become central nodes: initial network proximity to prospective adopters, and technological progress that reduces their relative price. Semiconductors met both conditions.

Andrew Atkeson and Ariel Burstein, University of California, Los Angeles and NBER

Aggregate Implications of Innovation Policy (NBER Working Paper 17493)

Atkeson and Burstein examine the quantitative impact of changes in innovation policies on growth in aggregate productivity and output in a fairly general specification of a growth model in which aggregate productivity growth is driven by investments in innovation by imperfectly competitive firms. The researchers' model nests several commonly used models in the literature. They present simple analytical results isolating the specific features and/or parameters of the model that play the key roles in shaping its quantitative implications for the aggregate impact of policy-induced changes in innovative spending in the short-, medium- and long-term. They find that the implicit assumption made commonly in models in the literature that there is no social depreciation of innovation expenditures plays a key role not previously noted in the literature. Specifically, they find that the elasticity of aggregate productivity and output over the medium term horizon (i.e. 20 years) with respect to policy-induced changes in the innovation intensity of the economy cannot be large if the model is calibrated to match a moderate initial growth rate of aggregate productivity and builds in the assumption of no social depreciation of innovation expenditures. In this case, the medium term dynamics implied by the model are largely disconnected from the parameters of the model that determine the model's long run implications and the socially optimal innovation intensity of the economy.

Sina Ateş, University of Pennsylvania, and Felipe Saffie, University of Maryland

Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection

Ateş and Saffie combine the real business cycle small open economy framework with the endogenous growth literature to study the productivity cost of a sudden stop. In this economy, productivity growth is determined by successful implementation of business ideas, yet the quality of ideas is heterogeneous and good ideas are scarce. A representative financial intermediary screens and selects the most promising ideas, which gives rise to a trade-off between mass (quantity) and composition (quality) in the entrant cohort. Chilean plant-level data from the sudden stop triggered by the Russian sovereign default in 1998 confirms the main mechanism of the model, as firms born during the credit shortage are fewer, but better. A calibrated version of the economy shows the importance of accounting for heterogeneity and selection, as otherwise the permanent loss of output generated by the forgone entrants doubles, which increases the welfare cost by 30%.

Marti Mestieri, Toulouse School of Economics; Diego A. Comin, Dartmouth College and NBER; and Danial Lashkari, Harvard University

Structural Transformations with Long-Run Price and Income Effects

Comin, Lashkari, and Mestieri present a multi-sector model of growth that accommodates long-run real income effects and sectoral price trends. Consistent with post-war data from OECD countries, their model generates constant aggregate growth rates, constant interest rates and non-constant sectoral expenditure shares (non-homothetic Engel curves). The researchers' model is consistent with the decline in agriculture, the hump-shaped evolution of manufacturing and the rise of services both in nominal and real terms. The authors estimate the demand system derived from the model–which takes a simple log-linear form–using historical data on sectoral shares from 30 different countries and household survey data. They show that the model parsimoniously accounts for the broad patterns of sectoral reallocation observed among rich, miracle and developing economies in the post-war period.

Benjamin Pugsley and Aysegul Şahin, Federal Reserve Bank of New York

Grown-up Business Cycles

Pugsley and Şahin document two striking facts about U.S. firm dynamics and interpret their significance for aggregate employment dynamics. The first observation is the steady decline in the firm entry rate over the last thirty years, and the second is the gradual shift of employment from younger to older firms over the same period. Both hold across industries and geography. The researchers show that despite these trends, firms' lifecycle dynamics and their business cycle properties have remained virtually unchanged. Consequently, the reallocation of employment towards older firms results entirely from the cumulative effect of the 30-year decline in firm entry. This "startup deficit" has both an immediate and a delayed (by shifting the age distribution) effect on aggregate employment dynamics. Recognizing this evolving heterogeneity is crucial for understanding shifts in aggregate behavior of employment over the business cycle. With mature firms less responsive to business cycle shocks, the cyclical component of aggregate employment growth diminishes with the increasing share of mature firms. At the same time, the trend decline in firm entry masks the diminishing cyclicality in contractions and reinforces it during expansions, which generates the appearance of jobless recoveries where aggregate employment recovers slowly relative to output.