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This edition was written by Alex Conner, Tristan Loa, Georgia Nabors, and Louise Sheiner.
Examining 20th-century firm-level Census data, Leonardo D’Amico of Harvard and co-authors find that construction productivity, estimated as newly started housing units per construction employee, declined after 1970, diverging from the productivity gains in the rest of the economy. This decline coincided with an increase in land-use regulations that limited the size of construction projects. The authors argue that these regulations led entrepreneurs to take on smaller projects with a higher probability of permitting. As a result, firms became smaller, reducing economies of scale and incentives to invest in innovation. Using data on construction firms in 2012, the authors show that, consistent with their model, smaller constructions firms are less productive than larger ones. Assuming that half of the link between firm size and productivity is causal, they estimate that construction companies would produce 60% more units per employee if firm size distribution resembled the manufacturing sector where large firms dominate. This implies that firm size alone could explain a significant fraction of low productivity in the construction sector.
How do food stamps affect the long-run labor market outcomes of early childhood beneficiaries? Marianne Bitler of the University of California, Davis, and Theodore F. Figinski of the U.S. Treasury examine the impacts of the food stamp program across areas with different adoption timing. They find that women from counties in which food stamps were available for the entirety of their early childhood (conception to age 5) earned 3% more at age 32. For women who lived in these counties and whose parents actually participated in the program, income at age 32 was approximately 16% higher. These effects were more pronounced in areas with a pre-existing food support program, a finding the authors attribute to the already-established infrastructure for administering food stamps and determining eligibility. They find limited evidence of a long-run earnings effect among men.
Aditya Aladangady, Jacob Krimmel, and Tess Scharlemann of the Federal Reserve Board estimate how mortgage lock-in – which occurs when the prevailing mortgage rate exceeds rates on existing mortgages – affects housing markets and household mobility. As market rates rise above those on borrowers' existing mortgage loans, the likelihood of moving falls. Some 1.6 million fewer moves occurred in 2022 compared to 2021; the authors say lock-in, caused by the Fed’s rate hikes, explains about 700,000 of this reduction. They show that a decline in moves driven by the desire for larger homes and better neighborhoods within a geographic labor market explains almost all of the drop. Long-distance, job-driven moves were largely unaffected by lock-in. The authors take this as evidence that lock-in does not significantly reduce labor market matching efficiency. They show that lock-in raised prices, especially in areas where housing markets were already tight.
“In recent years we have seen globalization reach a plateau and, notably, more frequent interruptions to global value chains in an increasingly fragmented geopolitical landscape. Protectionist measures are still looming on the horizon, so the risk of increased bottlenecks in global value chains also remains. Some geopolitical risks may escalate abruptly, requiring equally abrupt adjustments in the economy which would cause further production bottlenecks. We already experienced this during the energy crisis following Russia’s invasion of Ukraine, when Europe quickly needed to reduce its dependence on Russian energy. China being a top provider of foreign critical inputs for industries in the EU – like the nickel used in car batteries and the silicon used in solar panels – might cause similar bottlenecks if the supply of those inputs suddenly dries up," says Frank Elderson, Member of the Executive Board of the European Central Bank.
"...While we cannot avoid the occurrence of bottlenecks, we must be able to identify them and assess the implications for price stability. Besides accounting for the implications of geopolitical risks, fragmentation and climate and nature hazards for the productive capacity of the economy, we must also assess these effects in conjunction with changes to demand that are likely to occur at the same time. And, as bottlenecks may have an impact on the financial resilience of firms, there may also be financial transmission channels which must not be overlooked. If financial risks arising from bottlenecks were to impair the soundness of financial institutions – despite all our efforts as a banking supervisor to mitigate them – the effectiveness of our monetary policy could also be adversely affected. We cannot pre-empt exactly what the appropriate policy response to an emerging bottleneck would be. Therefore, the flexibility and data-dependency that we have applied in navigating the challenges of the past few years will remain crucial in the years to come.”
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