Hutchins Roundup: Multinational Competition, Long-Term Recession Effects, and More

Sage Belz and
Sage Belz Former Research Analyst - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Louise Sheiner
Sheiner Headshot Square
Louise Sheiner The Robert S. Kerr Senior Fellow - Economic Studies, Policy Director - The Hutchins Center on Fiscal and Monetary Policy

October 11, 2018

Studies in this week’s Hutchins Roundup find that news about foreign competition raises domestic productivity, minority and low-educated workers face lower earnings after recessions, and more.

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Multinational competition increases productivity

Economic theory says the arrival of foreign competition should encourage domestic firms to increase innovation, but many researchers have failed to find evidence of productivity gains after the arrival of foreign firms. Cathy Ge Bao of Beijing’s University of International Business and Economics and Maggie Xiaoyang Chen of George Washington University say researchers may have the timing wrong. Using information from news outlets, television, and social media in 200 countries, they find that local firms respond to announcements about future multinational competition by boosting investment and becoming more innovative. In contrast, the actual arrival of competition has no effect on firm productivity or wages. Their analysis suggests news about multinational competition accounts for 5 percent of firm productivity growth between 2001 and 2007.

Minority and low-educated workers face persistently lower wages after recessions

Research has shown that college graduates who enter the labor market during a recession have permanently lower earnings than those who enter when unemployment is low, but little is known about how other workers fare. Using Census data from 1976 to 2015, Hannes Schwandt of Stanford University and Till von Wachter of the University of California, Los Angeles, find that the negative effect of entering the job market during a recession is larger for nonwhite and less educated workers than for white and college-educated workers. While the negative effect on earnings for college graduates disappears after 6 years, it persists for a decade for those with a high school degree or less. High unemployment rates in the first years of working increase the likelihood of poverty for these workers, and government social insurance only partially offsets the decline in their earnings.

Common ownership among banks has no effect on competition

Several scholars recently have argued that common ownership of publicly traded firms reduces competition, as firms that share major stockholders have weaker incentives to maximize their own profits. If common ownership causes competition to decline, prices and industry profits would both be higher. Jacob Gramlich and Serafin Grundl of the Federal Reserve Board use regulatory filings for U.S. banks from 2001 to 2016 to create a measure of common ownership among banks, and find it has no significant effect on profitability. They conclude that neither the degree of common ownership nor bank cross-ownership increases profits, suggesting common ownership has little or no effect on competition in the banking industry.

Chart of the Week: Fed is outpacing other G3 central banks in balance sheet wind down

G3 central banks net securities purchases, 2016-2018

Quote of the Week:

“The pull of demographic forces doesn’t just affect labor force participation; it plays a role in dynamism as well. The U.S. economy has historically been dynamic. By that I mean the standard economics definition of turnover in businesses, jobs, and worker mobility, rather than innovative and energetic, though that’s certainly apropos. Dynamism has been on the decline for the past 30 years or so. If we want to keep the economy from stagnating, we need as many participants in the workforce as possible. We also need a workforce that is trained and adaptive to change. There are real consequences to the skills and labor shortage. We often talk about it in broad terms — the economic reality that businesses can’t expand and overall dynamism falls. That, in itself, is obviously a pressing issue, but zeroing in on specific sectors highlights the potential for ripple effects,” says Patrick Harker, president of the Federal Reserve Bank of Philadelphia.

“[…] I actually think we have an incredible opportunity, one that doesn’t come around often. We have a labor force with very little slack left, and there is a confluence of discussions about the future of higher education, the importance of skills, and the impact of technology on our lives. It’s the perfect time to see these all in the frame of the bigger picture and consider what it means for the next five, 10, 20 years. That can help us to structure our education, training, and workforce to adapt and evolve as the landscape does.”