Studies in this week’s Hutchins Roundup find that in some industries, increased intangible capital boosts productivity, while in others, it boosts market power; aging population largely explains declining business startup rates, and more.
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Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Research Analyst - Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution
In some industries, increased intangible capital boosts productivity; in others, it boosts market power
Business investment in physical capital has been weak in recent years, especially given the level of stock prices and interest rates. Nicholas Crouzet and Janice Eberly of Northwestern University suggest one explanation for this weakness: While investment in physical capital investment has been declining since 1995, investment in intangible capital such as software, research & development, intellectual property, and branding has been increasing. The investment in intangibles has been concentrated among industry leaders and thus closely related to the rise in industry concentration which has taken place over the same period, the authors say. In the consumer and high-tech sectors, this investment in intangibles has helped leading companies increase productivity, increase market share, and strengthen their competitive advantage. In contrast, in the health-care sector, investment in intangibles may have helped industry leaders raise mark-ups rather than increase productivity. The authors suggest policymakers should avoid a “one size fits all” approach to policies aimed at addressing concentration. They note that policies that create incentives for investment in intangibles (like intellectual property protection) may increase concentration in some industries, while policies aimed at reducing concentration may discourage productivity-enhancing investment in intangible assets in others.
Fatih Karahan of the Federal Reserve Bank of New York, Benjamin Pugsley of the University of Notre Dame, and Ayşegül Şahin of the University of Texas at Austin argue that the pace at which new businesses are formed —measured as the number of new employers as a fraction of all employers—has been declining in the United States for the past four decades because an aging population has led to a slowdown in labor supply. High startup rates need increasing labor supply, they say, because more labor supply puts downward pressure on wages, encouraging the entry of new firms; and new firms are more likely to exit, further increasing startup rates. Using the Census Bureau’s Longitudinal Database and the Business Dynamics Statistics, the authors find that the slowdown in U.S. labor supply growth since the late 1970s explains about two-thirds of the decline in the startup rate. They show that the startup rate increased during the 1960-70s when labor supply accelerated as Baby Boomers entered the workforce, and that startup rates declined in states that experienced slowdowns in labor force growth.
According to Andrew Forester of the Federal Reserve Bank of San Francisco and co-authors, changes in productivity growth in specific sectors of the economy rather than economy-wide developments account for most of the decline in productivity growth and in labor force participation over the past 70 years. Building a model in which sectors of the economy depend on other sectors for materials and capital, the authors find that sustained contractions in productivity growth in construction accounts for 30% of the estimated 2.3 percentage point decrease in trend GDP growth since 1950. Declining productivity in nondurable goods and professional and business services explains an additional 25%, they say.
Chart of the seek: Growth in new orders for durable goods orders is falling
“Globalization provided people with comfort, you were in an environment where you felt like you could travel to most places, that you could expand your business.” says Peter Praet, chief economist at the European Central Bank.
“Suddenly now you have this zero-sum game, with this very worrisome ‘America First’ rhetoric. Businesses really aren’t used to that.”