Economic Growth Small Group

Members of the NBER's Economic Growth Program (small group) met February 28 in San Francisco. Martí Mestieri of Northwestern University and Faculty Research Fellow Christopher Tonetti of Stanford University and NBER organized the meeting. These researchers' papers were presented and discussed:

Matthew J. Delventhal, Claremont McKenna College; Jesús Fernández-Villaverde, University of Pennsylvania and NBER; and Nezih Guner, Center for Monetary and Financial Studies

Demographic Transitions Across Time and Space

The demographic transition, i.e., the move from a regime of high fertility/high mortality into a regime of low fertility/low mortality, is a process that almost every country on Earth has undergone or is undergoing. Are all demographic transitions equal? Have they changed in speed and shape over time? And, how do they relate to economic development? To answer these questions, Delventhal, Fernández-Villaverde, and Guner put together a data set of birth and death rates for 188 countries that spans more than 250 years. Then, they use a novel econometric method to identify start and end dates for transitions in birth and death rates. The researchers find, first, that the average speed of transitions has increased steadily over time. Second, they document that income per capita at the start of these transitions is more or less constant over time. Third, the researchers uncover evidence of demographic contagion: the entry of a country into the demographic transition is strongly associated with its neighbors, countries that are geographically and culturally close, having already entered into the transition even after controlling for other observables. Next, a model of demographic transitions is built that can account for these facts. The model economy is populated by different locations. In each location, parents decide how many children to have and how much to invest in their human capital. There is skill-biased technological change that diffuses slowly from the frontier country, Britain, to the rest of the world.

Sebastian Heise, Federal Reserve Bank of New York, and Tommaso Porzio, University of California, San Diego

Workers' Home Bias and Spatial Wage Gaps: Lessons from the Enduring Divide between East and West Germany

Even within dynamic and integrated labor markets, real wage differences across regions often persist for decades. Germany is an example: more than 25 years after the East-West reunification, firms in the East are still paying 17% lower real wage per efficiency unit of labor. Heise and Porzio use detailed microdata, interpreted through a new model of worker reallocation across regions and firms, to show that workers' attachment towards their home region, or home bias, allows this wage gap to persist without leading to large migration waves. While workers move frequently across firms and regions, job flows and accepted wage offers are biased towards the home region, thus effectively segmenting the two labor markets, and shielding low productivity firms in the East from competition. The researchers estimate the home bias, and use matched employer-employee data to unpack it into three components: preferences, labor frictions, and skills. General equilibrium counterfactuals show that the different sources of home bias have sharp, but distinct, effects on aggregate wages and on workers' utility.

Wyatt Brooks and Terence R. Johnson, University of Notre Dame, and Kevin Donovan, Yale University

Bringing Data to the Model: Quantitative Implications of an Equilibrium Diffusion Model

Brooks, Donovan, and Johnson consider an increasingly utilized class of general equilibrium model in which knowledge diffusion generates positive spillovers across firms. Each period a firm "matches" with another randomly chosen firm, and can internalize some portion of the matched firm's productivity. Within this class of models, the researchers prove that a small set of parameters characterizing the diffusion process are uniquely identified with exogenous and random variation in matches, and moreover, are independent of the remaining parameter values. The researchers conduct a randomized controlled trial among Kenyan firms in which firms from the left tail of the profit distribution are matched one-to-one with firms from the right tail, then use the empirical results to estimate these parameters. The quantitative results imply an important role for knowledge diffusion in a series of policy experiments in the model. Removing a labor market distortion, for example, increases real income by 69 percent at the estimated parameters, compared to 33 percent in an identical model with no productivity transmission. The researchers show that the identification results extend to a number of alternative modeling assumptions, including occupational choice and endogenous search intensity, using the same empirical moments.

Victor Couture, University of California, Berkeley; Cecile Gaubert, University of California, Berkeley and NBER; Jessie Handbury, University of Pennsylvania and NBER; and Erik Hurst, University of Chicago and NBER

Income Growth and the Distributional Effects of Urban Spatial Sorting

Couture, Gaubert, Handbury, and Hurst explore the link between rising nominal incomes at the top of the income distribution, within-city spatial sorting, and real income inequality. They develop and quantify a spatial model of a city with heterogeneous agents and non-homothetic preferences for endogenous differentiated private neighborhood amenities (e.g., restaurants and entertainment). As the rich get richer, their increased demand for such luxury amenities drives housing prices up in downtown areas, where amenity development is fueled by economies of density. The poor are made worse off, either being displaced or paying higher rents for amenities that they do not value as much. Using the model, the researchers find that the neighborhood change within urban areas during the last two decades increased the welfare of richer households relative to that of poorer households by an additional two percentage points above and beyond the differential income growth. The researchers conclude that welfare estimates of increased income inequality are understated if within-city spatial sorting responses are ignored.

Hugo Hopenhayn, University of California, Los Angeles and NBER, and Julian Neira and Rish Singhania, University of Exeter

From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share (NBER Working Paper No. 25382)

The U.S. economy has undergone a number of puzzling changes in recent decades. Large firms now account for a greater share of economic activity, new firms are being created at a slower rate, and workers are getting paid a smaller share of GDP. Hopenhayn, Neira, and Singhania show that changes in population growth provide a unified quantitative explanation for these long-term changes. The mechanism goes through firm entry rates. A decrease in population growth lowers firm entry rates, shifting the firm-age distribution towards older firms. Heterogeneity across firm age groups combined with an aging firm distribution replicates the observed trends. Micro data show that an aging firm distribution fully explains i) the concentration of employment in large firms, ii) and trends in average firm size and exit rates, key determinants of the firm entry rate. An aging firm distribution also explains the decline in labor's share of GDP. In the model, older firms have lower labor shares because of lower overhead labor to employment ratios. Consistent with their mechanism, the researchers find that the ratio of non-production workers to total employment has declined in the U.S.

Jie Cai, Shanghai University of Finance and Economics; Nan Li, International Monetary Fund; and Ana Maria Santacreu, Federal Reserve Bank of Saint Louis

Knowledge Diffusion, Trade and Innovation across Countries and Sectors

Cai, Li, and Santacreu provide a unified framework to quantify the cross-country and cross-sector interactions between trade, innovation and knowledge spillovers. The researchers study the effect of trade liberalization in a multi-country and multi-sector endogenous growth model in which comparative advantage and the stock of knowledge are endogenously determined by innovation and knowledge spillovers. A reduction in trade costs induces a reallocation of innovation and comparative advantage across sectors: innovation real-locates towards sectors that experience larger increases in comparative advantage, and comparative advantage reallocates towards sectors with stronger knowledge spillovers. Growth and welfare are larger in the counterfactual balanced growth path (BGP). Heterogeneity in knowledge spillovers strengthens comparative advantage, generating additional sources of growth and welfare.

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