Potential
Consequences of Post-Brexit Trade Barriers for Earnings Inequality in the UK
We examine the distributional consequences of post-Brexit trade barriers
on wages in the UK. We quantify changes in trade costs across industries, accounting for input–output
links across domestic industries and global value chains. We allow for demand substitution by firms
and consumers, and worker reallocation across industries. We document the impact at the individual
and household level. Blue-collar workers are the most exposed to negative consequences of higher
trade costs, because they are more likely to be employed in industries that face increases in trade
costs, and are less likely to have good alternative employment opportunities available in their local
labour markets. Overall, new trade costs have a regressive impact, with lower-paid workers facing
higher exposure than higher-paid workers once we account for the exposure of other household members.
with Rachel Griffith and Peter Levell (Economica, 2021).
Paper
Accompaniment
Income
inequality and the labour market in Britain and the US
We study household income inequality in both Great Britain
and the United States and the interplay between labour market earnings and the tax system.
While both Britain and the US have witnessed secular increases in 90/10 male earnings inequality
over the last three decades, this measure of inequality in net family income has declined in
Britain while it has risen in the US. To better understand these comparisons, we examine the
interaction between labour market earnings in the family, assortative mating, the tax and
welfare-benefit system and household income inequality. We find that both countries have witnessed
sizeable changes in employment which have primarily occurred on the extensive margin in the US and
on the intensive margin in Britain. Increases in the generosity of the welfare system in Britain
played a key role in equalizing net income growth across the wage distribution, whereas the
relatively weak safety net available to non-workers in the US mean this growing group has seen
particularly adverse developments in their net incomes.
with Richard Blundell, Robert Joyce and James P. Ziliak (JPubE, 2018).
Paper
Accompaniment
Disaster Management
Climate change is making natural disasters more frequent, yet little is known
about the capacity of firms to withstand such disasters and adapt to their increased frequency. We examine this issue using a the
latest wave of the World Management Survey (WMS) that includes new questions on firms’ climate change perceptions and adaptation
behavior. Combining this with geocoded data on natural disasters and previous WMS waves, we create a panel spanning 8,000
firms across 33 countries and three decades that shows exposure to disasters decreases growth inputs, outputs and firm survival.
More importantly, firms with structured management practices are more resilient, suffering much smaller drops in jobs and capital.
To understand the mechanisms behind this resilience, we use the new WMS climate questions to show better managed firms have more
accurate perceptions of climate-related risks to their businesses. Such firms are also more likely to have implemented measures to
adapt to climate change both overall and in response to their perceived climate risk. Other aspects of firm organisation, such as
decentralisation, also help protect against disasters, but their adaptation behaviour is not well-targeted. These results show that
improving management is one way to help protect economies from climate change shocks.
with John Van Reenen.
Paper
Accompaniment
Production Function Estimation Using
Subjective Expectations Data
Standard methods for estimating production functions in the Olley and Pakes (1996)
tradition require assumptions on input choices. We introduce a new method that exploits (increasingly available) data on a firm’s
expectations of its future output and inputs that allows us to obtain consistent production function parameter estimates while
relaxing these input demand assumptions. In contrast to dynamic panel methods, our proposed estimator can be implemented on very
short panels (including a single cross-section), and Monte Carlo simulations show it outperforms alternative estimators when firms’
material input choices are subject to optimization error. Implementing a range of production function estimators on UK data, we
find our proposed estimator yields results that are either similar to or more credible than commonly-used alternatives. These
differences are larger in industries where material inputs appear harder to optimize. We show that TFP implied by our proposed
estimator is more strongly associated with future jobs growth than existing methods, suggesting that failing to adequately account
for input endogeneity may underestimate the degree of dynamic reallocation in the economy.
with Áureo de Paula and John Van Reenen.
Paper
Accompaniment
An Engine of (Pay) Growth?
Productivity and Wages in the UK Auto Industry
When labour market competition is imperfect, positive industry (and firm)
productivity shocks can be passed through to workers in the form of higher wages. We document how the UK auto industry,
following a period of decline, experienced a four-decade-long productivity boom. There was a thirteen-fold increase in real
output per worker between 1980 and 2018, compared to a four-fold increase in manufacturing. Greater foreign ownership, tougher
competition and improved industrial relations all likely played a role. The greater use of intermediate inputs (outsourcing)
and growing capital intensity account for most of this growth, but we estimate that TFP still grew three times as fast in the
auto industry than the rest of manufacturing. Examining whether this productivity increase has been shared with employees, we
find that auto workers experienced far stronger hourly wage growth than workers in the rest of manufacturing. After controlling
for individual fixed effects, the auto wage premium relative to the rest of manufacturing doubled from 8% in the 1980s to 17%
in the 2010s. Interpreted through the lens of a rent sharing model, we estimate that most of the wage increase (63% in the
baseline case) can be accounted for by the auto productivity boom. In contrast, the bargaining power of UK auto workers seems
to have fallen. If worker power had held up at the 1980s level, the wage premium would have been about 38% higher in the 2010s.
with Tim Obermeier, Andreas Teichgraeber and John Van Reenen.
Paper
Accompaniment
When Trade Drives Markup Divergence:
An Application to Auto Markets
When firms sell in multiple markets, estimates of markups from the demand-side will
generally diverge from estimates based on the supply-side (e.g. via production functions). The empirical examination of the
importance of this fact has been hampered by the absence of market-specific cost data. To overcome this, we show production markups
can be expressed as the revenue-weighted average of demand-based markups across markets (and products). This highlights that a divergence
in demand-based and production-based markups is due to the revenue shares and markups across foreign and domestic markets, factors that
can be assessed with readily available trade data. Using data from auto firms producing in the UK, we show production-based markups
increased between 1998 and 2018 whereas demand-based markups decreased. These trends can be reconciled by an increase in the markup
that UK-based producers gained on their exports, which we corroborate using administrative trade data. We find that increases in
production-based markups have been driven by exports, particularly to China where foreign brands command high markups.
with Tim Obermeier, Andreas Teichgraeber and John Van Reenen.
Paper
Accompaniment
Brexit and Investment
In 2016, the UK voted to leave the European Union and growth in UK manufacturing
investment ground to a halt. This paper uses administrative trade data to investigate the
causal relationship between these events. We exploit firm-level customs data from 2005 on-
wards to quantify firms’ exposure to EU and non-EU trade in inputs and outputs. Focusing
on investment as a forward-looking, dynamic outcome (since the UK did not leave the EU
until 2021), we relate firms’ investment to their pre-referendum EU exposure. This analysis
shows firms’ exposure to EU trade had a negative impact on investments post-referendum,
especially in 2021. Estimated impacts are stronger for import exposure than for export
exposure and there is some evidence of depressed investment from exposure to non-EU im-
ports, likely due to the large depreciation in sterling that followed the vote. Had the UK
voted to remain in the EU, these estimates imply manufacturing investment would have
been over 7% higher, about £2.4 billion annually between 2016 and 2021
with John Van Reenen.