Hutchins Roundup: Data, firm entry, and more

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Firms’ access to data impacts their market power

Jan Eeckhout of UPF Barcelona and Laura Veldkamp of Columbia develop a theoretical framework in which data reduces firms’ uncertainty. They identify two competing channels by which data access affects firms’ market power and markups. In the first, data helps firms better predict consumer demand, encouraging firms to increase production for any given level of investment and thereby lowering prices and markups. In the second, data reduces uncertainty surrounding investment decisions, encouraging firms to make larger investments that lower their marginal costs and increase markups. The authors find that the balance of these two channels depends on the relative efficiency of firms’ investments and their pricing of risk. Their model predicts that the growing volume of data will reduce markups at the product level, but increase them at the firm and industry level. The authors suggest that data is generally welfare-improving but can amplify the costs of market power.

Official data confirm surge in new businesses during second half of 2020

Official data on business entry and exit are released with long lags, making it difficult to identify firm exit and entry trends in real time. During the pandemic, many economists measured firm entry using data on applications to the IRS for employer identification numbers , which are released in a more timely manner. Comparing applications with the Bureau of Labor Statistics’ count of actual business entries, Ryan A. Decker of the Federal Reserve Board and John Haltiwanger of the University of Maryland find that the surge in applications in the second half of 2020 turned out to be a good predictor of business entry. While business exits also rose early in the pandemic (which was also predicted based on nontraditional data like mobile phone tracking), entries eventually came to outnumber exits in 2020. The authors note that official statistics—like those underlying GDP and the monthly jobs report from the Establishment Survey—do not account for business entry and exit in real time. They conclude that “the timeline of business entry and exit measurement remains a material limitation of the U.S. statistical system.”

Remote learning was a primary driver of widening achievement gaps during the pandemic

High-poverty schools were more likely to go remote during the pandemic and their students suffered greater learning losses when they did so, find Dan Goldhaber of the University of Washington and co-authors. Using data from 2.1 million students in schools across the U.S., the authors compare students’ actual and expected achievement growth during the pandemic. Within school districts that were mostly remote in 2020-21, high-poverty schools experienced 50% more achievement loss than their low-poverty counterparts. In in-person districts, by contrast, these gaps widened by less for reading and not at all for math. The authors also show that most of the widening achievement gap by race during the pandemic occurred not because Black and Hispanic students fell behind their peers within the same school, but because they attended schools that were more negatively impacted by the pandemic. Closing these gaps will not be cheap. Comparing the share of the school year needed to make up student learning losses with the share of schools’ annual budget that they have received in federal aid, the authors estimate that mostly remote, high-poverty districts would need to spend almost all their federal aid on academic recovery alone.

Chart of the Week: Inflation declines slightly

Quote of the week:

“Three major imbalances are contributing to an overheating economy and high inflation. First, the effects of the pandemic have significantly increased demand for certain categories of spending, especially for durable goods and housing. This increase in demand is occurring while supply in these sectors is being adversely affected by the pandemic,” says John C. Williams, President of the Federal Reserve Bank of New York.

“The second major imbalance is in the labor market, where overall demand far exceeds existing supply. The ratio of job vacancies to the unemployed is near its all-time high, workers are quitting jobs at a record rate, and employers are bidding up wages. This sizzling hot labor market is also related to the imbalance between demand and supply for goods and housing, as businesses seek to hire more workers to help meet the high demand. And labor supply shortages and rising labor costs are contributing to price pressures across a wide range of goods and services.

“Finally, global imbalances in supply and demand have also contributed to supply-chain problems that have affected the availability and costs of shipping, as well as a variety of inputs into production—including semiconductor chips used in making cars. The war in Ukraine and recent lockdowns in China have further constrained the global supply of goods and commodities, including food and energy.”

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