Category: Data Source

Declining Labor Force Growth Explains Declining Dynamism

The best paper I have read in a long time is Hopenhayn, Neira and Singhania’s From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share. HNS do a great job at combining empirics and theory to explain an important fact about the world in an innovative and surprising way. The question the paper addresses is, Why is dynamism declining? As you may recall, my paper with Nathan Goldschlag, Is regulation to blame for the decline in American entrepreneurship?, somewhat surprisingly answered that the decline in dynamism was too widespread across too many industries to be explained by regulation. HNS point to a factor which is widespread across the entire economy, declining labor force growth.

Figure Two of the paper (at right) looks complicated but it tells a consistent and significant story. The top row of the figure shows three measures of declining dynamism: the rise in concentration which is measured as the share of employment accounted for by large (250+) firms, the increase in average firm size, and the declining exit rate. The bottom row of the figure shows the same measures but this time conditional on firm age. What we see in the bottom figure is two things. First, most of the lines jump around a bit but are generally flat or not increasing. In other words, once we control for firm age we do not see, for example, increasing concentration. Peering closer at the bottom row the second thing it shows is that older firms account for a larger share of employment, are bigger and have lower exit rates. Putting these two facts together suggests that we might be able to explain all the trends in the top row by one fact, aging firms.

So what explains aging firms? Changes in labor force growth have a big influence on the age distribution of firms. Assume, for example, that labor force growth increases. An increase in labor force growth means we need more firms. Current firms cannot absorb all new workers because of diminishing returns to scale. Thus, new workers lead to new firms. New firms are small and young. In contrast, declining labor force growth means fewer new firms. Thus, the average firm is bigger and older.

HNS then embed this insight into a dynamic model in which firms enter and exit and grow and shrink over time according to random productivity shocks (a modified version of Hopenhayn (1992)). We need a dynamic model because suppose the labor force grows today, this causes more young and small firms to enter the market today. Young and small firms, however, have high exit rates so today’s high entry rate will generate a high exit rate tomorrow and also a high entry rate tomorrow as replacements arrive. Thus, a shock to labor force growth today will influence the dynamics of the system many periods into the future.

So what happens when we feed the actual decline in labor force growth into the HNS dynamic model (calibrated to 1978.) Surprisingly, we can explain a lot about declining dynamism. At right, for example, is the startup rate. Note that it jumps up with rising labor force growth in the 1950s and 1960s and declines after the 1970s.

The paper also shows that the model predictions for firm age and concentration also fit the data reasonably well.

Most surprisingly, HNS argue that essentially all of the decline in the labor share of national income can be explained by the simple fact that larger firms use fewer non-production workers per unit of output. That is very surprising. I’m not sure I believe it.

If HNS are correct it implies a very different perspective on the decline in labor share. In the HNS model for example non-competitive factors do not play a role so there’s no monopoly or markups . Moreover, if the decline in labor share is caused by larger firms using fewer non-production workers then this is surely a good thing. In their model, however, there is only one factor of production so declining labor share means increasing profit share which I find dubious. If production and non-production labor are distinguished it may also be that declining non-production share will redound to production labor so the labor share won’t fall as much. Nevertheless, the ideas here are intriguing and the results on dynamism, which are the heart of the paper, do not rely on the arguments about the labor share.

What people actually say before they die

Deathbed aphorisms and declarations of love for one’s country are exceptions or inventions. According to one doctor, the last words of the dying are often strings of curses; a hospice nurse says that most dying men call for ‘Mommy’ or ‘Mama’, if they can call at all. “At the end of life, the majority of interactions will be non-verbal as the body shuts down and the person lacks the physical strength for long utterances. People will whisper, and they’ll be brief, single words — that’s all they have energy for.”

Here is the article by Michael Erard at The Atlantic, via The Browser.

China fact (?) of the day

China Daily reported Friday that unnatural deaths have taken the lives of 72 mainland billionaires over the past eight years. (Do the math.)

Which means that if you’re one of China’s 115 current billionaires, as listed on the 2011 Forbes Billionaires List, you should be more than a little nervous.

I don’t know about you but I find it somewhat improbable that among such a small population there could be so many “suicides,” “accidents” and “death by disease” (the average age of those who died from illness was only 48).

Here is the Forbes story by Ray Kwong, I am not sure how confirmed to treat this as being.

From the comments:

According to the original Chinese version of the news report, the base (number of billionaires) should be 60k, not just 115. I think ‘billionaires’ refers to 100M CNY in the original news report. It’s still shocking though…
“2010年,这一数字同比增长了9.1%,达到6万人左右。” http://www.chinadaily.com.cn/dfpd/shehui/2011-07/22/content_12957783.htm

Right. The Chinese number units are ones, tens, hundreds, thousands, ten thousands, and ten thousand ten thousands. The “billionaires” in the article are ten thousand ten thousandaires.

+1 (Google Translate confirms that the base is 55k people 🙂 )
The mortality rates now seem far more reasonable…

Ratio of <= 40 to >= 50 scientists funded by the NIH

The dotted line at the top is the Jones-implied ratio of productivity of <= 40 year olds to >= 50 year-olds, as drawn from Figure 1 in this source.

For the construction of this data source I am indebted to PseudoMontaigne.  Does it not imply that NIH funding is vastly over-allocated according to the criterion of seniority?  Or might this be the rise of the lab system, where the older people are the PIs, and they in turn dole this money out to younger researchers?  More middlemen, so to speak.  Opinions?

The United States is Underpoliced and Overprisoned

Daniel Bier has a nice rundown on the ratio of police to prison spending comparing the United States to Europe. The US spends less on police and more on prisons than any European country.

Moreover, this is not because Europe spends less on criminal justice. Surprisingly, there is very little correlation between total spending and the ratio of police to prison spending. What we see in the graph below, for example, is that Europe is on the right, indicating more police to prison spending but not noticeably below the US states on total spending as a percent of GDP.

As I have argued before, the United States is underpoliced and overprisoned.

Does temporary migration from rich to poor countries cause commitment to development?

The author is Lee Crawfurd and the subtitle of the paper is “Evidence from quasi-random Mormon mission assignments.”  Here is part of the abstract:

…we address this question using a natural experiment–the assignment of Mormon missionaries to two-year missions in different world regions–and test whether the attitudes and activities of returned missionaries differ. I find that assignment to a region in the global South causes returned missionaries to report greater interest in global development and poverty, but no difference in support for government aid or higher immigration, and no difference in personal donations or other involvement.

Maybe Mormons are different in this regard, or maybe missions are different (you feel you have done your bit?), but still an interesting result.

Does Exposure to the Refugee Crisis Make Natives More Hostile?

Although Europe has experienced unprecedented numbers of refugee arrivals in recent years, there exists almost no causal evidence regarding the impact of the refugee crisis on natives’ attitudes, policy preferences, and political engagement. We exploit a natural experiment in the Aegean Sea, where Greek islands close to the Turkish coast experienced a sudden and massive increase in refugee arrivals, while similar islands slightly farther away did not. Leveraging a targeted survey of 2,070 island residents and distance to Turkey as an instrument, we find that direct exposure to refugee arrivals induces sizable and lasting increases in natives’ hostility toward refugees, immigrants, and Muslim minorities; support for restrictive asylum and immigration policies; and political engagement to effect such exclusionary policies. Since refugees only passed through these islands, our findings challenge both standard economic and cultural explanations of anti-immigrant sentiment and show that mere exposure suffices in generating lasting increases in hostility.

That is the abstract of a new paper by Dominik Hangartner, Elias Dinas, Moritz Marbach, and Konstantinos Matakos, via the excellent Kevin Lewis

Greek life isn’t as good as you thought

Using records from a large public university, we examine the impact of Greek life on academic performance and salaries. To isolate the causal effect of Greek life, we exploit a university policy prohibiting students from joining a Greek organization during their first semester and a minimum GPA for subsequent eligibility. Regression discontinuity and panel methods reveal that Greek affiliation reduces student grades by 0.1-0.3 standard deviations. Greek effects are largest during the semester of pledging, semesters of increased social activities, and for males. We find no evidence of a Greek salary premium and rule out even modest positive effects.

That is from a new paper by William E. Even and Austin C. Smith, being presented at the AEa meetings this week.

Do longer sentences reduce crime?

I find that Republican prosecutorial offices sentence defendants to longer incarceration spells as compared to their Democratic and Independent counterparts. This increase in incarceration length is driven by longer sentences for both violent and prop- erty offenses, and translates into a persistent increase in incarceration. These sentencing and incarceration enhancements do not lower crime at the county level, indicating that, in terms of public safety, the marginal return to the tough-on-crime stance may be close to zero.

That is from a new AEA paper by Ashna Arora.

Does Cognitive Imprecision Result in Under-Reaction or Over-Reaction?

That is the topic of a new paper by Michael Woodford, to be presented at this year’s AEA meetings.  Here at least is the abstract:

Men who score high on standardized IQ tests display forecast errors for inflation that are 50% lower than forecast errors for other men in a representative sample of Finnish households. High-IQ men, but not others, have consistent inflation expectations over time and their inflation perceptions align with past expectations. Only high-IQ men increase their consumption propensity when expecting higher inflation in line with the consumption Euler equation. High-IQ men are also twice as sensitive to interest-rate changes when making borrowing decisions. Heterogeneity in education, income, or financial constraints do not explain these results. Limited cognitive abilities are thus human frictions to the transmission and effectiveness of economic policy and inform research on heterogeneous agents in macroeconomics and finance.

How many papers are there in economics about psychological cognitive bias as a source of error, as opposed to low IQ as a source of error?  Might that be a bias of sorts and not one of IQ?

52 things learned by Kent Hendricks

Here are a few:

Contrary to the beliefs of roughly 33% of Americans, Kansas is not the flattest state. In fact, it’s the 9th flattest state, and it’s one of only two Great Plains states to make the top ten (the other is North Dakota). The flattest state is actually Florida, the second flattest state is Illinois, and the least flattest is West Virginia. (Disruptive Geo)

…The average high school GPA of a representative sample of 700 millionaires in the United States is 2.9. (Eric Barker, Barking Up the Wrong Tree: The Surprising Science Behind Why Everything You Know About Success Is (Mostly) Wrong)

…Dinosaurs roamed the earth for a long time. Tyrannosaurus Rex is closer in time to humans than to Stegosaurus. (Peter Brannen, The Ends of the World: Volcanic Apocalypses, Lethal Oceans, and Our Quest to Understand Earth’s Past Mass Extinctions)

…Pepperoni pizza is subject to more government regulation than plain cheese pizza. That’s because cheese pizzas are regulated by the Food and Drug Administration, while pepperoni pizzas—which have meat—are regulated by the Department of Agriculture. (Baruch Fischhoff and John Kadvany, Risk: A Very Short Introduction)

Here is the full list, interesting throughout.

Resource wealth depends on market orientation

This paper explores the effect of market orientation on (known or available) natural resource wealth using a novel dataset of world-wide major hydrocarbon and mineral discoveries. Our empirical estimates based on a large panel of countries show that increased market orientation causes a significant increase in discoveries of natural resources. In a thought experiment where economies in Latin America and sub-Saharan Africa remain closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s. Our results call into question the commonly held view that known or available natural resource endowments are exogenous.

That is the abstract of a new paper by Rabah Arezki, Frederick van der Ploeg, and Frederik Toscani, via the excellent Kevin Lewis.

At what ages do children stop believing in Santa Claus?

Research in the Journal of Cognition and Development in 2011 shows that 83% of 5-year-olds think that Santa Claus is real, the study’s lead author, Jacqueline Woolley, wrote in The Conversation last year.

“We have found in more recent studies that that number of 85% sounds about right,” said Thalia Goldstein, assistant professor of applied developmental psychology at George Mason University in Fairfax, Virginia.

“Children’s belief in Santa starts when they’re between 3 and 4 years old. It’s very strong when they’re between about 4 and 8,” she said. “Then, at 8 years old is when we start to see the drop-off in belief, when children start to understand the reality of Santa Claus.”

What about across the pond?  They seem to be asleep over there:

Of 161 parents in the United Kingdom, 92.5% thought Father Christmas was real for their children up to the age of 8, according to a research paper presented at the annual meeting of the European Early Childhood Education Research Association in Finland in 1999.

And here is a study vulnerable to the replication crisis:

The interviews revealed that 39.2% of the children believed that the man they visited was the same Santa who came down their chimneys…1.3% had a somewhat “adult belief,” Goldstein said, in which they said that the man was not Santa and did not live at the North Pole but could communicate with the real Santa.

That is a CNN article from last year.  Why is the word “marginal” declining in popularity?  How many seven year olds know what “marginal” means?  How many know not to believe everything the President says?  How many understand hedging?

Is Islam Compatible with Free-Market Capitalism? An Empirical Analysis, 1970–2010

Are majority-Muslim countries laggards when it comes to developing liberal economic institutions? Using an Index of Economic Freedom and its component parts, this study finds that Muslim-dominant countries (>50% of the population) are positively associated with free-market capitalism. Protestant dominance is also positively correlated, but the association stems from just two components of the index, mainly “legal security and property rights protection.” Surprisingly, Protestant countries correlate negatively with “small government” and “freedom to trade,” two critical components of free-market capitalism. Muslim dominance shows positive correlations with all areas except for “legal security and property rights.” The results are consistent when assessing similar variables measuring property rights and government ownership of the economy collected by the Varieties of Democracy Project. Capitalistic policies and institutions, it seems, may travel across religions more easily than culturalists claim.

That is by Indra de Soysa, I call it speculative but nonetheless an underrated point, via the excellent Kevin Lewis.