Working Papers

Factor-Biased Outsourcing: Implications for Capital-Labor Substitution

February 2023

Outsourcing can be factor biased, displacing disproportionately either capital or labor inside the firm. Relying solely on the assumption of homogenous input demand, this paper shows that factor-biased outsourcing acts as a wedge, leading the capital–labor ratio to respond differently to a change in the price of labor and to a change in the price of capital. Indirect estimates based on a meta analysis of studies since the 1960s, as well as direct estimates using U.S. data for 1963–2016, indicate that outsourcing principally displaces labor and that, consequently, the capital-labor ratio responds 30-80% more strongly to the price of labor than to the price of capital. These findings also help reframe historical disagreements regarding the extent of capital–labor substitution.

The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends?

with John Fernald and Robert Inklaar, February 2023

This paper reviews advanced-economy productivity developments in recent decades. We focus primarily on the facts about, and explanations for, the mid-2000s productivity slowdown across advanced economies. Focusing on large European countries and the United States, slower total factor productivity growth was the proximate cause of the slowdown in labor-productivity growth. We discuss measurement challenges at some length, such as the role of intangible assets, rankings of productivity levels, and data revisions. Still, the overall pattern is of a stagnating productivity frontier and a lack of convergence to that frontier. The two main narratives to explain the mid-2000s slowdown are the shock of the Global Financial Crisis versus a common slowdown in productivity trends. Distinguishing these theoretically and empirically is hard, but the pre-recession timing of the U.S. slowdown suggests an important role for the common-trend slowdown. We also discuss the unusual pattern of productivity growth in the U.S., UK, and euro area 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 for productivity growth.


Globalization and Top Income Shares

with Lin Ma, Journal of International Economics, 2020

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.

Returns to Scale, Productivity Measurement, and Trends in U.S. Manufacturing Misallocation

with Sui-Jade Ho, Accepted, Review of Economics and Statistics, 2021

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.

Firms and Collective Reputation: a Study of the Volkswagen Emissions Scandal

with Rüdiger Bachmann, Gabriel Ehrlich, Ying Fan and Benjamin Leard, Accepted, Journal of the European Economic Association, 2022

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.