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Who Benefits From Productivity Growth?

From a new NBER working paper by Richard Hornbeck, Enrico Moretti,  "Who Benefits From Productivity Growth? Direct and Indirect Effects of Local TFP Growth on Wages, Rents, and Inequality"

Abstract:

We estimate the local and aggregate effects of total factor productivity (TFP) growth on US workers' earnings, housing costs, and purchasing power.  Drawing on four alternative instrumental variables, we consistently find that when a city experiences productivity gains in manufacturing, there are substantial local  increases in employment and average earnings.  For renters, increased earnings are largely offset by increased cost of living; for homeowners, the benefits are substantial. 

Strikingly, local productivity growth reduces local inequality, as it raises earnings of local less-skilled workers more than the earnings of local more-skilled workers.  This is due, in part, to lower geographic mobility of less-skilled workers. 

However, local productivity growth also has important general equilibrium effects through worker mobility.  We estimate that 38% of the overall increase in workers' purchasing power occurs outside cities directly affected by local TFP growth.  The indirect effects on worker earnings are substantially greater for more-skilled workers, due to greater geographic mobility of more-skilled workers, which increases inequality in other cities.  Neglecting these general equilibrium effects would both understate the overall magnitude of benefits from productivity growth and misstate their distributional consequences. 

Overall, US workers benefit substantially from productivity growth.  Summing direct and indirect effects, we find that TFP growth from 1980 to 1990 increased purchasing power for the average US worker by 0.5-0.6% per year from 1980 to 2000.  These gains do not depend on a worker's education; rather, the benefits from productivity growth mainly depend on where workers live.

Gated version of paper is available here. 

Robert Gordon's latest working paper: "Why has economic growth slowed when innovation appears to be accelerating?

From the eminent Robert Gordon of Northwestern University, a new working paper on the productivity slowdown in the West. 

Abstract:

Measured between quarters with identical unemployment rates, U. S.  economic growth slowed by more than half from 3.2 percent per year during 1970-2006 to only 1.4 percent during 2006-16, and only half of this GDP growth slowdown is accounted for diminished productivity growth.  The paper starts from the proposition that GDP growth matters, not just productivity growth, because slower GDP growth provides fewer resources to address the nation's problems, including faltering education, aging infrastructure, and the looming shortfall in funding for Social Security and Medicare, and it also implies lower net investment and a reduced rate at which new capital can embody the latest technology.   

The paper documents the contribution to slower GDP growth of the separate components of demography -- fertility, mortality, life expectancy, and immigration.  Particular emphasis is placed on the interaction between rising inequality and the slower secular rise of life expectancy in the U.S. compared to other developed countries, both in the form of a large gap in life expectancy between rich and poor, and the stagnation of life expectancy for the lowest income quintile.  Further contributions to slowing growth are made by a decline in the population share of both legal and illegal immigration and a turnaround from rising to declining labor force participation.  Rising inequality creates a gap between the growth of average real per-capita income relative to that of median real income, and alternative measures of the evolution of this gap are compared and assessed. 

Read more of the abstract at NBER.

Agglomeration theory: a new paper

From a new NBER Working Paper, "Firm Sorting and Agglomeration," by Cecile Gaubert

Abstract:

The distribution of firms in space is far from uniform. Some locations host the most productive large firms, while others barely attract any. In this paper, I study the sorting of heterogeneous firms across locations and analyze policies designed to attract firms to particular regions (place-based policies). I first propose a theory of the distribution of heterogeneous firms in a variety of sectors across cities. Aggregate TFP and welfare depend on the extent of agglomeration externalities produced in cities and on how heterogeneous firms sort across them. The distribution of city sizes and the sorting patterns of firms are uniquely determined in equilibrium. This allows me to structurally estimate the model, using French firm-level data. I find that nearly half of the observed productivity advantage of large cities is due to firm sorting. I use the estimated model to quantify the general equilibrium effects of place-based policies. I find that policies that decrease local congestion lead to a new spatial equilibrium with higher aggregate TFP and welfare. In contrast, policies that subsidize under-developed areas have negative aggregate effects.

The paper is available here at NBER.

Robert J. Gordon's opus: The Rise and Fall of American Growth

Robert Gordon's magisterial work on economic growth has made it to the top of my reading stack. 

He is becoming one of my favorite economists.  

Here's Ed Glaeser's review from the Wall Street Journal.

More on the automated economy from NBER

From a new NBER working paper, "Artificial Intelligence, Automation and Work,"  by Daron Acemoglu and Pascual Restrepo. 

Abstract:

We summarize a framework for the study of the implications of automation and AI on the demand for labor, wages, and employment.  Our task-based framework emphasizes the displacement effect that automation creates as machines and AI replace labor in tasks that it used to perform.  This displacement effect tends to reduce the demand for labor and wages.  But it is counteracted by a productivity effect, resulting from the cost savings generated by automation, which increase the demand for labor in non-automated tasks.  The productivity effect is complemented by additional capital accumulation and the deepening of automation (improvements of existing machinery), both of which further increase the demand for labor. These countervailing effects are incomplete.  Even when they are strong, automation increases output per worker more than wages and reduce the share of labor in national income.  The more powerful countervailing force against automation is the creation of new labor-intensive tasks, which reinstates labor in new activities and tends to increase the labor share to counterbalance the impact of automation.  Our framework also highlights the constraints and imperfections that slow down the adjustment of the economy and the labor market to automation and weaken the resulting productivity gains from this transformation:  a mismatch between the skill requirements of new technologies, and the possibility that automation is being introduced at an excessive rate, possibly at the expense of other productivity-enhancing technologies.

New NBER Working Paper: Diagnosing the Italian Disease

A new working paper by Bruno Pellegrino and Luigi Zingales. From the abstract: 

We try to explain why Italy's labor productivity stopped growing in the mid-1990s.  We find no evidence that this slowdown is due to trade dynamics, Italy's inefficient governmental apparatus, or excessively protective labor regulations.  By contrast, the data suggest that Italy's slowdown was more likely caused by the failure of its firms to take full advantage of the ICT revolution.  While many institutional features can account for this failure, a prominent one is the lack of meritocracy in the selection and rewarding of managers.  Familyism and cronyism are the ultimate causes of the Italian disease. 

Read more at NBER Working Papers.