Declining business dynamism and illusive allocative efficiency

Productivity isn’t just a function of innovation. New ideas and technology have the capacity to greatly boost the productive capacity of an economy, but those forces are for naught if new ways of doing things are not spread throughout the economy or if resources don’t flow to more productive companies. The benefits of such “allocative efficiency” is one reason why some researchers and policymakers are concerned about a less dynamic U.S. economy. If fewer companies are being started and workers are less likely to switch jobs, then productivity might take a hit. New research suggests that this is happening.

The paper is from Ryan Decker of the Board of Governors of the Federal Reserve System, John Halitwanger of the University of Maryland, and Ron Jarmin and Javier Miranda, both of the U.S. Census Bureau. The four economists use firm-level data on productivity to decompose (breakout into constituent parts) several trends in U.S. labor productivity growth. The decomposition roughly divides productivity growth into three buckets. The “within-firm” bucket captures productivity growth for existing firms. The second bucket indicates the change in productivity growth due to reallocation between existing firms. And the third bucket shows how much of productivity growth is due to the gains from firms entering the economy.

What the four economists find that is that productivity growth among existing firms isn’t the primary driver of the drop-off in overall productivity growth that we’ve seen since the turn of the century. The biggest decline among the three factors is in the second one, indicating a decline in reallocation between existing firms. In other words, employment and economic output are not flowing to the more productive firms. The third bucket also contributed to the post-2000 decline in productivity growth, as the net entry of new businesses also was on the decline, indicative of the potential impact of the declining start-up rate in the United States. The authors do note that the first factor—within-firm productivity—may also be contributing to some extent as productivity growth among high-productivity firms has declined.

As the authors note, many explanations of declining productivity growth popular among policymakers, the media, and some economists focus on slowing technological advancement or the mismeasurement of new technologies. This new decomposition points instead at declines in business dynamism as a possibly more fruitful avenue for getting a grip on why U.S. productivity growth has been slowing. The research by these four economists provides far from a definitive answer, yet the paper suggests a refocusing on research and conversation in this area that might be, well, very productive.

The impact of consumer credit access on employment, earnings and entrepreneurship

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Authors:

Kyle Herkenhoff, Assistant Professor of Economics, University of Minnesota
Gordon Phillips, C.V. Starr Foundation Professor and Academic Director of the Center for
Private Equity and Entrepreneurship at the Tuck School of Business, Dartmouth College
Ethan Cohen-Cole, Managing Director and Financial Services Practice Lead, Econ One Research


Abstract:

How does consumer credit access impact job flows, earnings, and entrepreneurship? To answer this question, we build a new administrative dataset which links individual employment and entrepreneur tax records to TransUnion credit reports, and we exploit the discrete increase in consumer credit access following bankruptcy flag removal. After flag removal, individuals flow into self-employment. New entrants earn more, borrow significantly using unsecured and secured consumer credit, and are more likely to become an employer business. In addition, after flag removal, non-employed and self-employed individuals are more likely to find unemployment-insured “formal” jobs at larger firms that pay greater wages. These estimates imply that firms believe previously bankrupt workers are 3.8% less productive than non-bankrupt workers, on average. These results suggest that consumer credit access matters for each stage of entrepreneurship and that credit-checks may be limiting formal sector employment opportunities.

Problems with destination-based corporate taxes and the Ryan blueprint

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Authors:

Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan Law School
Kimberly A. Clausing, Thormund A. Miller and Walter Mintz Professor of Economics, Reed College


Abstract:

With the election of Donald Trump and the Republican Party’s domination of Congress, House Speaker Paul Ryan’s blueprint for fundamental tax reform requires more careful analysis. The Ryan blueprint combines reduced individual rates with a destination-based cash flow type business tax applicable to all businesses. The destination based business tax at the center of the blueprint has several major problems: It is incompatible with our WTO obligations, it is incompatible with our tax treaties, and it will not eliminate the problems of income shifting and inversions it is designed to address. In addition, these proposals generate vexing technical problems that are not easily fixed as well as significant political problems. Finally, due to the tax rates that have been proposed, the plan is likely to generate large revenue losses and a less progressive tax system. We conclude by recommending better tax policy solutions to our current corporate tax problems.

Please see the accompanying fact sheet.

Local economic decline affects marriage and fertility rates, but in a surprising way

Photo of a gear from an air compressor that provided plant air for the former Ormet plant lies on the ground at the site in Hannibal, Ohio. Manufacturing’s decline has impacted local marriage and fertility rates, but in different ways depending on whether the affected industry is male- or female-intensive.

Scholars have long thought about how our jobs shape our identities both in an out of the workplace. But a new paper shows the extent to which one’s job—or lack thereof—also impacts the roles we assume within our family life. The research, by Massachusetts Institute of Technology’s David Autor, University of Zurich’s David Dorn, and University of California-San Diego’s Gordon Hanson looks at what happens to families in the United States when work disappears, specifically in areas with a high concentration of manufacturing that are hard-hit by trade.

Men and women have both paid the cost economically speaking, but they have reacted differently to their changing fortunes. Whether an affected industry is male-intensive versus female-intensive has a profound effect on local marriage and fertility trends. Traditional marriage patterns are more common in areas where men’s economic status remains superior to women’s, but less so where men’s jobs have taken the largest hit.

Manufacturing has historically been a “good job” in the sense that it was steady and well-paying for someone without a college degree. Men have always been more likely to hold these jobs, partially due to the perception that “it’s still dirty and dark and dangerous.” Women who do work in manufacturing tend to be concentrated in certain industries, such as textiles, apparels, and leather. In the 1990s, the share of female manufacturing workers peaked at 32 percent and has since fallen, as women-dominant sectors were hit especially hard during the Great Recession.

The gender gap in manufacturing matters because manufacturing jobs tend to pay more—17 percent on average—than non-manufacturing jobs, which contributes to a gender gap in pay. In fact, the male-female gap in annual earnings is much larger in areas in which a large share of adults (men and women) working in manufacturing. In these areas men take home, on average, a much bigger paycheck than their female counterparts.

But over the past few decades, manufacturing has been on the decline due to increased competition and trade, leaving many men—and women—out of a job or earning less. But with all the anxiety that’s accompanied this shift, it’s easy to overlook another key trend—growth in the service sector has added more jobs than were lost in manufacturing. These jobs tend to be low-paying, however, which is one reason many men are reluctant to take them, along with the perception that they are too feminine.  Whatever the reason, one thing is clear: Manufacturing’s decline has diminished many men’s economic status in comparison to women, especially men in the bottom quarter of the income spectrum.

The story of what happens next is familiar. Families struggling to make ends meet. Men dropping out of the labor force all together. An explosion of drug and alcohol use, and, for some, premature death, alongside the rise of incarceration during the same time period. The authors of the paper found that all these phenomena were more prevalent among men in areas where manufacturing declined.

It’s no surprise, then, that entire families would be affected, especially considering that these demographic and social shifts resulted in fewer men overall in these hard-hit regions of the country. Areas that were economically affected most by trade saw a reduction in the number of young adults who are married. These regions also experienced a declining birth rate and a higher rate of babies born to single mothers (and because of that, more child poverty). The authors find that these trends are pervasive across all racial and ethnic groups.

It could be that women are unwilling to legally bind themselves to men who are facing financial, legal, or health problems—or that there are fewer men to marry. Autor and his coauthors believe that these are all valid reasons for the decline in marriage, but also point to research by Marianne Bertrand and Emir Kamenica of University of Chicago, and Jessica Pan of the National University of Singapore. In their paper, they find that marriage becomes less likely between men and women if a women’s income is likely to exceed that of her future husband. The three scholars find that “standard economic models […] cannot account for this pattern. Instead, we argue that gender identity norms play an important role in marriage.”

This hypothesis is further born out by looking at regions that only saw a decline in female-intensive industries, which are fewer in number but have faced enormous upheaval, especially during the Great Recession. Not only did marriages in these areas not decline, but instead marriage rates went up while reducing the number of children who live in single-headed households.

Of course, the overall declines in marriage and single-headed households aren’t driven exclusively by the decline in manufacturing. But this research does speak to how much workers’ identities are tied up with presumed work roles in life, whether that’s one’s job, economic status, or gender. What is clear is that these norms are increasingly costly in the face of a changing economy. The inability of policymakers to help workers adapt is creating a crisis that has a ripple effects for the entire U.S. economy, political system, and prosperity of future generations.

Should-Reads: February 26, 2017


Interesting Reads:

Should-Read: Paul Krugman: Maid In America

Should-Read: Paul Krugman: Maid In America: “[In 1996] I argued… that menial work dealing with the physical world…

…gardeners, maids, nurses–would survive even as quite a few jobs that used to require college disappeared…. Big data has led to more progress in something that looks like artificial intelligence than I expected…. The point about the relative displacement of cognitive versus manual jobs seems to stand…. The disruptiveness of such technological change is something we should take seriously…. The initial effect of the Industrial Revolution was a substantial de-skilling of goods production. The Luddites were, for the most part, not proletarians but skilled craftsmen, weavers who constituted s sort of labor aristocracy but found their skills devalued by the power loom. In the long run industrialization did lead to higher wages for everyone, but the long run took several generations to happen—in that long run we really were all dead…. It remains peculiar how we’re simultaneously worrying that robots will take all our jobs and bemoaning the stalling out of productivity growth. What is the story, really?

Should-Read: Jonathan Chait: Trump’s Health-Care Nightmare Is Only Just Beginning

Should-Read: Jonathan Chait: Trump’s Health-Care Nightmare Is Only Just Beginning: “Republican members of Congress do not agree with each other on the parameters of a replacement…

…Conservatives have demanded a repeal of Obamacare’s Medicaid expansion… oppose the use of refundable tax credits to subsidize coverage… the law should ban subsidies for any health-insurance plan that covers abortion…. The beliefs Republican members of Congress do agree on are not shared by their voters… [who] like Medicaid, and dislike the fact that exchange plans have high deductibles…. A belief in higher deductibles is the conservative movement’s central health-care policy conviction… forcing consumers to have “skin in the game”….

Republicans were able to paper over this yawning chasm between what their base demands and what their elites are offering for the last eight years only because they have been able to avoid a specific alternative. Republicans attacked Obamacare for its high deductibles, and Trump promised a replacement that would give everybody better coverage for less money. But their proposals would do the opposite…. Obamacare was not a perfectly designed law, but it did reflect a kind of political genius…. Obamacare did create some losers: The very rich… and young, healthy people [who] have to pay higher premiums… but they were vastly outnumbered by the winners: millions of people who could now have access to insurance who once could not afford it. The Republican plan… would create very few winners and an enormous number of losers….

The last ten polls all show net positive approval for the Affordable Care Act…. And this is all happening before Republicans have published a detailed plan. That is the most amazing aspect of all. Obamacare repeal faces dire peril, and the most painful steps have yet to come.

Weekend reading: “Adjusting to the new borders” edition

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

If you don’t pay much attention to labor law, you’d be forgiven for thinking that for a worker to be covered by a union she had to be a member of a union. But that’s not correct. And as Matt Markezich shows, the difference can be quite large in some countries.

Economists have studied extensively the effects of increasing the minimum wage on the U.S. labor market. Yet boosting the wage floor is likely to have consequences on more than the labor market. John Schmitt writes up new research on access to credit for workers affected by a higher minimum wage.

The border-adjustment aspect of the House Republican plan for corporate tax reform has drawn the most attention. But don’t forget that the plan also calls for cutting the corporate rate. Policymakers should be skeptical that’ll do much to boost business investment.

Links from around the web

Perhaps the biggest question for the U.S. economy in 2017 is how much slack, or underutilized potential, remains. Neil Irwin takes a look at the state of slack and explains how the debate about how hot the economy can get will impact policy. [the upshot]

Relatedly, the concept of a “non-accelerating inflation rate of unemployment,” or NAIRU, has come under attack recently. Simon Wren-Lewis defends the concept from attacks, saying it’s critical for talking about macroeconomics. [mainly macro]

Over the past six years or so, the International Monetary Fund has increasingly grappled with the question of how inequality affects economic growth. Prakash Loungani and Jonathan D. Ostry write on how research on inequality weighs in the IMF’s work. [imf direct]

President Trump and his administration may not be fans of running trade deficits, but they sure do like foreign investment. But as Ana Swanson, there’s some tension there as trade deficits and capital account surpluses are different sides of the same coins. [wonkblog]

Mary Amiti, Oleg Itskhoki, and Jozef Konings don’t think border adjustment aspect of corporate tax reform will do much to increase exports. In fact, their analysis finds that it may actually depress exports in the short term. [liberty street economics]

Friday figure

Figure from “Why is collective bargaining so difficult in the United States compared to its international peers?” by Matt Markezich

Should Reads: February 24, 2017


Interesting Reads:

Should-Read: Marco Buti and Karl Pichelmann: European integration and populism: Addressing Dahrendorf’s quandary

Should-Read: Marco Buti and Karl Pichelmann: European integration and populism: Addressing Dahrendorf’s quandary: “With its current competences lacking the ability to address distribution effects…

…the EU is seen as an agent of globalisation rather than a response to it.  At the same time, it is charged with undermining national autonomy, identity, and control. This column sets out five guiding principles for policy articulation at the EU level for a new positive EU narrative…. The current rise in populist parties is a wake-up call resembling what the late Ralf Dahrendorf… summarised a little more than 20 years ago as a quandary…

To stay competitive in a growing world economy [the OECD countries] are obliged to adopt measures which may inflict irreparable damage on the cohesion of the respective civil societies. If they are unprepared to take these measures, they must recur to restriction of civil liberties and of political participation bearing all the hallmarks of a new authoritarianism (…) The task for the first world in the next decade is to square the circle between growth, social cohesion and political freedom…