Hutchins Roundup: Pass-through businesses, Bitcoin, and more 


What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Expansions in pass-through business activity have lowered the labor share of income  

The labor share of income in the U.S. corporate sector has been steadily declining in recent decades. Using administrative tax data, Matthew Smith of the U.S. Treasury and co-authors estimate that about a third of this decline has been driven by the rise in pass-through business activity over the 1978-2017 period. Pass-through businesses have tax incentives to classify owners’ labor income as profits or to form partnerships (for financial, legal, and consulting services, etc.) that move labor-intensive activities away from the corporate sector. The authors estimate that had the shift towards pass-through businesses since the 1980s not occurred, the labor share of income in the corporate sector would have been 1.6 percentage points larger in 2017. The authors’ adjustments are concentrated among mid-market firms in services, suggesting that the remaining decline in the labor share is driven by the manufacturing sector and by the rising importance of superstar firms, they conclude.  

Highly concentrated Bitcoin market susceptible to systemic risk  

By combining data from blockchain—the technology used to record transactions of Bitcoin and other cryptocurrencies—with information scraped from blogs and websites, Igor Makarov of the London School of Economics and Antoinette Schoar of MIT construct a dataset of real entities holding Bitcoin and use algorithms to analyze the behavior of Bitcoin market participants. They find that 90% of transactions are not related to substantial economic activity, and 75% of the transactions since 2015 involve buying and selling Bitcoin. In addition, the Bitcoin market is highly concentrated, with the top 10% of bitcoin miners controlling 90% of Bitcoin mining capacity and the top 50 miners (0.1%) controlling close to 50%. In addition, between 60% and 80% of mining capacity is in China. Finally, the top 1,000 investors own about one-fifth of all bitcoins, while the top 10,000 investors own about one-third. Overall, almost half of all bitcoins are owned by individual investors rather than banks and other intermediaries. Such a highly concentrated market, the authors conclude, makes the Bitcoin ecosystem susceptible to systemic risk and wider acceptance of Bitcoin will likely only benefit a small group of people.  

Labor force exits during the pandemic were larger for Black women, Latinas, and women living with children  

Examining differences in the labor force participation of women aged 25 to 54 in the U.S. during the COVID-19 pandemic, Katherine Lim and Mike Zabek from the Federal Reserve Board find that labor force participation of Black and Latina women declined by over 4 percentage points during the first few months of the pandemic. In the fall and winter of 2020, Black women’s labor force participation increased but participation among Latina women remained persistently lower. In addition, the authors show that women with young children were more likely to exit the labor force than women without childrenreflecting the unique demands of raising children during the pandemic. Among women with primary-school-age children in the household, excess pandemic-era labor force exits were concentrated among lower-earning women. Moreover, the authors find that the presence of children explains roughly one-fourth of the labor force exits in excess of the pre-pandemic trend for Black and Latina women. The authors conclude that “the coincident increase in labor force exits among women living with children suggests that regular, reliable, and available childcare plays an important role in supporting women’s labor force participation”.

Chart of the week: Bond market investors expect elevated inflation rates to persist 

Line graph showing the difference in yields between 5-year inflation-protected and nominal Treasury notes from 2017 to present

Quote of the week:  

“The fundamental dilemma that we face at the Fed right now is this: Demand, augmented by unprecedented fiscal stimulus, has been outstripping a temporarily disrupted supply, leading to high inflation. But the fundamental productive capacity of our economy as it existed just before COVID—and, thus, the ability to satisfy that demand without inflation—remains largely as it was, and the factors that are disrupting it appear to be transitory. Looked at purely in that light, constraining demand now, to bring it into line with a transiently interrupted supply, would be premature. Given the lags with which monetary policy acts, we could easily find that demand is damping just as supply is increasing, leading us to undershoot our inflation target—and, in the worst case, we could depress the incentives for supply to return, leading to an extended period of sluggish activity and unnecessarily low employment,” says Randal Quarles, Member, Federal Reserve Board of Governors. 

“I am among those who see a good chance that inflation will remain above 2% next year, but I am not quite ready to conclude that this ‘transitory’ period is already ‘too long.’ We haven’t yet met the more stringent tests for liftoff that we have laid out in forward guidance about the federal funds rate … Importantly, the level of uncertainty around the paths for inflation and employment are higher than normal as we navigate the unprecedented reopening of the world economy. Therefore, we will remain outcome based, waiting to see further improvements in employment and the evolution of inflation pressures in coming months. And, if the broadly held expectation that inflation will recede next year turns out to be wrong or if inflation expectations show signs of becoming unanchored to the upside, I am confident that the monetary policy tools at our disposal can bring inflation down toward our 2% goal.” 

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