We present evidence that weak household demand contributed to a reduction in firm entry in the Great Recession. Motivated by this evidence, we characterize aggregate growth dynamics in response to demand shocks in a broad class of endogenous growth models. We show that the aggregate impacts of demand shocks are determined completely through their impact on current profits, and take a tractable form. We then study quantitatively the response of growth to a severe deleveraging event in general equilibrium, by coupling this class with the classic incomplete markets setting for households. We find a persistent recession induced by deleveraging can significantly influence growth in productivity. In turn, the growth slowdown provides a novel source of propagation; households increase savings in response to future slow growth, exacerbating the fall in demand, and slowing the recovery.
In this paper, we provide evidence for higher returns to experience in big cities. We exploit a government policy of quasi-random settlement of political refugees in Denmark between 1986 and 1998, which generated plausibly exogenous variation in workers’ initial local labor market. Detailed matched employer-employee datasets allow us to track workers’ location and labor market experience, including their employers. We show that the slope of a refugee’s lifetime wage path depends strongly and positively on initial placement in the country’s capital, Copenhagen. Conditional on observables, settled refugees initially earn similar hourly wages across regions, but those placed in Copenhagen see their wages grow 0.81% faster than others with each year of experience they accumulate. We further show that this premium is driven by the greater acquisition of experience at high-wage establishments and by differential sorting across occupations. Estimating a spatial model of earnings dynamics reveals that sorting on unobserved ability within cities plays an important role in explaining observed patterns.
Works in Progress
Declining Dynamism, Increasing Markups and Missing Growth: The Role of the Labor Force (with Michael Peters)
A growing body of empirical research highlights substantial changes in the US economy during the last three decades. Business dynamism – namely job reallocation, firm entry and creative destruction – is declining. Market power, as measured by markups and industry concentration, seems to be on the rise. Aggregate productivity growth is sluggish. We show that declines in the rate of growth of the labor force can qualitatively account for all of these features in a standard model of firm-dynamics. Despite its richness we can characterize the link between population growth and dynamism, markups and growth analytically. When we calibrate the model to the universe of U.S. Census data, the labor force channel can explain a large fraction of the aggregate trends.
Job Market Paper: Market Size, Entrepreneurship and Local Growth