Factor-Biased Outsourcing: Implications for Capital-Labor Substitution
Dimitrije Ruzic, June 2023
Outsourcing can be factor biased, displacing disproportionately either capital or labor inside the firm. Relying solely on the assumption of homogeneous input demand, this paper shows that factor-biased outsourcing leads 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, and they have direct implications for modeling production and cost, implying that capital and labor are not separable from outsourced inputs.
Superstars or Supervillains? Large Firms in the South Korean Growth Miracle
Jaedo Choi, Andrei Levchenko, Dimitrije Ruzic and Younghun Shim, July 2023
We quantify the contribution of the largest firms to South Korea's economic performance since 1970. Using firm-level historical data, we document a novel fact: firm concentration rose substantially during the growth miracle period. To understand whether the increased importance of large firms contributed positively or negatively to the South Korean growth miracle, we build a quantitative heterogeneous firm small open economy model. Our framework accommodates a variety of causes and consequences of (changes in) firm concentration: productivity, distortions, selection into exporting, 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 changing concentration. We find that most of the increased concentration is attributable to higher productivity growth of the largest firms. Shutting down the 10 largest firms' differential productivity growth would have decreased firm concentration and lowered markups, but nonetheless would have reduced welfare by 13.6%. Differential distortions and foreign market access of the 10 largest firms played a more limited role in the trends in concentration and had a smaller welfare impact. Thus, the largest Korean firms were superstars rather than supervillains.
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
Dimitrije Ruzic and Sui-Jade Ho, Accepted 2021
Review of Economics and Statistics 105 (5), 2023
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
Rüdiger Bachmann, Gabriel Ehrlich, Ying Fan, Dimitrije Ruzic and Benjamin Leard, Accepted 2022
Journal of the European Economic Association 21(2), 2023
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.
The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends?
John Fernald, Robert Inklaar and Dimitrije Ruzic, Accepted 2023
Review of Income and Wealth
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.