Declining Dynamism, Increasing Markups and Missing Growth: The Role of the Labor Force

49 Pages Posted: 12 Dec 2019 Last revised: 30 Dec 2019

See all articles by Michael Peters

Michael Peters

Yale University - Department of Economics; Yale University - Cowles Foundation

Conor Walsh

Columbia University

Date Written: November 6, 2019

Abstract

A growing body of empirical research highlights substantial changes in the US economy during the last three decades. Business dynamism is declining, market power seems to be on the rise, and aggregate productivity growth is sluggish. We show analytically that a decline in the rate of growth of the labor force implies all of these features in a frontier model of firm dynamics. The reason is that a decline in labor force growth reduces the long-run entry rate but keeps expansion incentives of incumbent firms unchanged. This implies that lower labor force growth reduces creative destruction, increases average firm size and raises market power. We calibrate the model to data on employment and sales for the universe of firms in the U.S. Census. We find that the empirically observed decline in the rate of labor growth since the 1980s can account for the decline in entry and the increase in firm size, generates quantitatively significant and welfare-relevant changes in markups, but plays a minimal role in explaining the decline in aggregate productivity growth.

Keywords: Dynamism, Growth, Firm Dynamics, Markups

JEL Classification: O40, D22, J11, O47

Suggested Citation

Peters, Michael and Walsh, Conor, Declining Dynamism, Increasing Markups and Missing Growth: The Role of the Labor Force (November 6, 2019). Available at SSRN: https://ssrn.com/abstract=3493284 or http://dx.doi.org/10.2139/ssrn.3493284

Michael Peters

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Conor Walsh (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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