Russell Cooper, John Haltiwanger, and Jonathan Willis
Working Paper 2024-3
February 2024
Abstract:
This paper studies competing sources of declining dynamism. Evidence shows that an important component of this decline is accounted for by the reduction in the response of employment to shocks in US establishments. Using a plant-level dynamic optimization problem as a framework for analysis, four potential reasons for this decline are studied: (i) a change in exogenous processes for profits, (ii) an increase in impatience, (iii) increased market power, and (iv) increasing adjustment costs. We identify and quantity the contribution of each of these factors building on a simulated method of moments estimation of our structural model. Our results indicate that the reduction in responsiveness largely reflects increased costs of employment adjustment. Changes in market power, as captured by changes in the curvature of the revenue function, play a minimal role. But, in the presence of rising adjustment costs, measured sales-weighted markups using the recently popular indirect production approach rise substantially, along with rising dispersion and skewness of such measured markups.
JEL classification: E24, E32, J23
Key words: declining dynamism, adjustment costs, employment
https://doi.org/10.29338/wp2024-03
Excellent research assistance from Tuna Dökmeci and Cody Tuttle and financial support from the Kauffman Foundation are greatly appreciated. The authors thank Shawn Klimek, Kirk White, participants at the Society of Economic Dynamics Conference in 2017, the Midwestern Macro Conference in 2018, the ASSA Meetings in 2020, and the Technology and Declining Economic Dynamism in 2020 for helpful comments. The views expressed herein are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Banks of Atlanta or Kansas City or the US Bureau of the Census. All results have been reviewed to ensure that no confidential information is disclosed. John Haltiwanger was a Schedule A employee at the US Bureau of the Census when this paper was written.
Please address questions regarding content to Russell Cooper, Department of Economics, the European University Institute; John Haltiwanger, Department of Economics, University of Maryland; or Jonathan L. Willis, Research Department, Federal Reserve Bank of Atlanta.
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