Hutchins Roundup: Business concentration, inflation and reallocation, and more 

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Business concentration has risen over the past century

Spencer Y. Kwon at Harvard, Yueran Ma at the University of Chicago, and Kaspar Zimmermann at the Leibniz Institute for Financial Research SAFE find evidence that a small number of firms account for an increasingly large share of production assets and output over the past century. For instance, the share of production assets held by the top 0.1% of corporations increased about 40 percentage points between 1930 and 2018, from 47% to 88%. The rise in business concentration was stronger in the manufacturing and mining industries in the pre-1970 period and stronger in the services, retail, and wholesale industries in the post-1970 period. Industries with stronger growth in business concentration have more operating costs that are fixed, higher research and development investment, and higher output growth than other industries, suggesting that the rise in business concentration may be due to productive firms investing in and achieving economies of scale.

Demand shock towards goods drove pandemic inflation  

Francesco Ferrante, Sebastian Graves, and Matteo Iacoviello of the Federal Reserve Board estimate the inflationary effects of the increased demand for goods, the reduction in labor supply, and sectoral productivity shocks experienced during the pandemic. They find that the shocks explain a large portion—almost 3.5 percentage points—of the rise in inflation from the fourth quarter of 2019 to the fourth quarter of 2021, largely driven by the demand reallocation shock. The authors note that their model can explain 81% of the variation in sectoral prices and two-thirds of the decline in employment over the period. Looking to the structural cause of inflation in their model, the authors conclude, “The asymmetry caused by hiring costs is key in understanding the inflationary effects of [the demand] shock: in services-producing sectors, the decline in demand translates largely into a fall in quantities rather than prices. In contrast, in goods-producing sectors the increase in demand pushes up prices due to the costs firms face in increasing their capacity.”

Cohort effects explain rise in between-firm earnings inequality 

The dramatic increase in earnings inequality in the U.S. over the past several decades has been driven by an increase in between-firm pay dispersion—the variance of average earnings across firms. Isaac Sorkin of Stanford and Melanie Wallskog of Duke find that this increase is well explained by cohort effects: successive cohorts of businesses have continually higher between-firm pay dispersion than their predecessors. Newer cohorts also have more sorting of workers across firms on the basis of pay, education, and age, and display greater productivity dispersion across firms. After controlling for year and life cycle patterns of firms, the authors conclude that these cohort effects may explain between 50% and 100% of the rise of between-firm earnings inequality from 1993 to 2013.  The authors expect inequality to continue to rise as older and more equal cohorts of firms are replaced by younger and more unequal cohorts.

Chart of the week: Inflation-adjusted wages are falling across advanced economies 

Chart courtesy of the Wall Street Journal

Quote of the week:

“The U.S. economy is stronger than what we previously thought. You certainly see that in the jobs report, unemployment ticking down, not up: a 50-year low. Job openings 2-to-1 compared to workers searching for work. Other indexes of the labor market [are] very, very strong; claims [are] still very low. I think you have a very strong labor market combined with more momentum coming out of the second half of 2022 than we previously thought. That adds up to markets wanting to price in a tougher road ahead for inflation,” says Jim Bullard, President of the St. Louis Fed.

“I think we are going to have to get north of 5%. Right now, I’m still at five and three-eighths.  We have a little ways to go here and I’ve argued that, let’s go where we want to go, and then we can see how the data come in. Let’s hope that we get disinflation in 2023 but right now, it came in hotter than we thought… Firms that are too nonchalant about their price increases are going to lose market share, possibly forever, possibly even go out of business.”

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