Research

This paper reevaluates the longstanding debate on capital-labor substitution by examining the role of external inputs: commodities, intermediate goods and services, imports, offshoring. Both indirect inference (analyzing existing estimates of substitution) and direct inference (using U.S. data for 1963-2016) indicate that external inputs disproportionately displace labor. These findings imply (1) that the capital-labor ratio responds 40-80% more strongly to the price of labor than to the price of capital, (2) that value added cannot be modeled separately from gross output, and (3) that historical disagreements regarding substitution can be recast as an omitted variable bias involving external inputs.

We quantify the contribution of the largest firms to South Korea’s economic performance over the period 1972-2011. Using firm-level historical data, we document a novel fact: firm concentration rose substantially during the growth miracle period. To understand whether rising concentration contributed positively or negatively to South Korean real income, we build a quantitative dynamic heterogeneous-firm small-open-economy model. Our framework accommodates a variety of potential causes and consequences of changing firm concentration: productivity, distortions, selection into exporting, scale economies, and oligopolistic and oligopsonistic market power in domestic goods and labor markets. The model is implemented directly on the firm-level data and inverted to recover the drivers of concentration. We find that most of the differential performance of the top firms is attributable to higher productivity growth rather than increasingly favorable distortions. Exceptional performance of the top 3 firms within each sector relative to the average firms contributed 19% to the 2011 real GDP and 5% to the net present value of welfare over the period 1972-2011. Thus, the largest Korean firms were superstars rather than supervillains.

Recent findings that markups of price over marginal cost appear large and heterogeneous across firms have opened new research paths for macroeconomists. Though these estimates are reshaping macroeconomics, they often rely on strong and controversial assumptions. We review the production approach to markups, which estimates markups as the residual that makes a flexible input's first-order condition hold, given its estimated output elasticity and revenue share. By bridging perspectives from industrial organization and macroeconomics, we address three key challenges. First, is the production approach practically and conceptually useful for questions we care about? Second, how do we estimate the key output elasticities given microdata and current econometric methods typically fall short of the theoretical ideal? Third, how do we use micro estimates in macro models? We conclude that while the empirical findings are tantalizingly important, the substantial practical challenges make them fragile. We suggest directions for best practices and future research.

This paper documents empirically that access to global markets is associated with a higher executive-to-worker pay ratio within the firm. It then uses China’s 2001 accession to the World Trade Organization as a trade shock to show that firms that exported to China prior to 2001 subsequently exported more, grew larger, and grew more unequal in terms of executive-to-worker pay. To evaluate analytically and quantitatively the impacts of globalization on top income inequality, this paper builds a model with heterogeneous firms, occupational choice, and executive compensation. In the model, executive compensation grows with the size of the firm, while the wage paid to ordinary workers is determined in a country-wide labor market. As a result, the extra profits earned in the foreign markets benefit the executives more than the average workers. We calibrate the model to the U.S. economy and match the income distribution closely in the data. Counterfactual exercises suggest that trade and FDI liberalizations can explain around 44 percent of the surge in top 0.1 percent income shares in the data between 1988 and 2008.

Aggregate productivity suffers when workers and machines are not matched with their most productive uses. This paper builds a model that features industry-specific markups, industry-specific returns to scale, and establishment-specific distortions, and uses it to measure the extent of this misallocation in the economy. Applying the model to restricted U.S. census microdata on the manufacturing sector suggests that misallocation declined by 13% between 1982 and 2007. The jointly-estimated markup and returns to scale parameters vary substantially across industries. Furthermore, while the average markup has been relatively constant, the average returns to scale declined over this period. The finding of declining misallocation starkly contrasts the 29% increase implied by the widely used Hsieh & Klenow (2009) model, which assumes that all establishments charge the same markup and have constant returns to scale. Accounting for the variation in markups and returns to scale leads to the divergence of misallocation estimates in this paper from those implied by the Hsieh-Klenow model.

This paper uses the 2015 Volkswagen (VW) emissions scandal as a natural experiment to provide evidence that collective reputation externalities are economically significant. Using a combination of difference-in-differences and demand estimation approaches, we document a spillover effect from the scandal to the non-VW German auto manufacturers. The spillover amounts to an average drop of $2,057 in consumer valuations of these manufacturers’ vehicles and to a 34.6% reduction in their annual sales. We substantiate our interpretation that the estimates reflect a reputation spillover using data on internet search behavior and direct measures of consumer sentiment from Twitter.

This paper reviews advanced-economy productivity developments in recent decades. We focus primarily on the facts about, and explanations for, the mid-2000s labor-productivity slowdown in large European countries and the United States. Slower total factor productivity (TFP) growth was the proximate cause of the slowdown. This conclusion is robust to measurement challenges including the role of intangible assets, rankings of productivity levels, and data revisions. We contrast two main narratives for the stagnating TFP frontier: The shock of the Global Financial Crisis; and a common slowdown in TFP trends. Distinguishing these two empirically is hard, but the pre-recession timing of the U.S. slowdown suggests an important role for the common-trend explanation. We also discuss the unusual pattern of labor productivity growth since the start of the Covid-19 pandemic. Although it is early, there is little evidence so far that the large pandemic shock has changed the slow pre-pandemic trajectory of labor-productivity growth.