Publication: Essays in Macroeconomics
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2021-03
Defense date
2021-06-03
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Abstract
During the last three decades, there have been many fundamental changes regarding the
evolution of most advanced economies, particularly the United States. Some remarkable
trends characterizing this evolution are the decline in business dynamism, the increase
in average pro ts and average markups of rms, the rise in market concentration, the
increase of robotization and automation, the decline in the labor share, the decline in
the entry rate of new rms, and the stagnation of productivity growth. The combination
of these facts has raised concerns, among others, about increasing inequality, declining
entrepreneurship due to the crowding-out of new entrants, and declining consumer purchasing
power. Although identifying the reasons underlying these facts is crucial from
a policy-making perspective, there is little agreement on these macroeconomic trends'
underlying cause(s). This dissertation consists of two chapters that attempt to shed light
on this discussion.
In the first chapter, `Inside the decline of the labor share: Bringing the tales together',
I analyze the decline in the United States labor income share during the last two decades.
This decline has been widely documented in the economic literature and is also contemporaneous
to a strong structural change process from manufacturing to services. In other
words, during the last two decades, the U.S. has continued its transformation into a more
service-oriented economy. In particular, I document the following trends regarding both
phenomena: i) the evolution of the labor share of income is widely heterogeneous across
industries, with a much more substantial decline in manufacturing than in services; ii) the
average wage, employment, and value added - the main components of the labor share -
exhibit a different pattern between manufacturing and services industries; iii) there is a
strong (relative) reallocation of labor and capital from manufacturing to services industries;
and iv) substantial capital deepening has taken place, increasing of the capital-labor
ratio of the economy together with the capital-output ratio of the economy.
I analyze both phenomena through the lens of a multi-sector model in which the main
mechanisms that have been proposed to explain the decline in the labor share - biased technological change and market power - also affect the process of structural change
between sectors. Moreover, I show that structural change is relevant for the overall labor
share as it affects the weight of each industry's labor share. I use the model to infer
the rate of technological change and market power - in the form of exogenous markups
- that match the U.S. data. The model can explain up to 87.4% of the decline in the
labor share of the U.S. economy. Moreover, I find that the increase in markups in the
manufacturing and services industries is the main reason underlying the decline. The
remaining part is accounted for by technological change, which after 2008 becomes more
important in explaining the decline in the labor share, especially in services industries.
Although market power also a ects the pace of structural change from manufacturing to
services, I show that technological change is its fundamental driver.
In the second chapter, `Provider-driven complementarity and firm dynamics', I concentrate
on the significant decline in business dynamism experienced in the U.S. since the
mid-1980s. This decline is (non-exhaustively) characterized by the following trends: i)
the entry rate of new firms has declined; ii) market concentration, measured by the share
of sales accruing to the biggest firms, has increased; iii) expenditure on R&D activities,
measured both as a fraction of total cost or total sales, has increased; and iv) the growth
rate of the economy has slowed down.
I offer a new explanation based on the assumption of provider-driven complementarity,
which makes seemingly independent products become complements when provided
by a single firm. Provider-driven complementarity boils down to the idea that during
the process of product innovation - the introduction of new and improved products to
the market - firms can embed differential characteristics to their products. These characteristics
are such that, absent quality differences across products, consuming several
goods from a single provider is preferable to purchasing each good from a di erent firm.
Based on this idea, I propose a framework that explains increasing R&D expenditures
and concentration yet decreasing entry rates and economic growth.
Theoretically, I develop a quality ladder growth model where provider-driven complementarity
is crucial in determining firms' incentives to challenge incumbents in their
established markets. Specifically, I assume that the complementarity effect increases in
the number of products supplied by each firm. Moreover, consumers buy each good from
the firm that delivers the highest quality, adjusted by provider-driven complementarity,
relative to its market price. I show that provider-driven complementarity generates an
endogenous barrier to entry in new markets. Consequently, despite firms use innovation
to increase profits, it also affects firms' industrial organization and can ultimately deter firm entry.
I use the theory of provider-driven complementarity to perform a quantitative exercise
in which I reduce the size of the average quality jump obtained after any successful
innovation. The exercise is motivated by the recent literature on ideas becoming harder
to find and can also be thought of as innovations becoming less radical over time. I
show that such decline induces a growth slowdown. Additionally, I find that the entry
rate declines, and incumbents become bigger and spend more resources on R&D, even
as the economy's overall growth rate declines. This contrasts with the predictions of a
standard quality ladder model without provider-driven complementarities, which implies
the reverse.