Most published economic research papers pass unnoticed by anyone but the authors. A few attract critical reviews by other economists. And fewer still attract the attention of non-economists — the analysts, investors, and policy makers who are interested in how our economy works and how it is doing.
A research paper by two academic economists belongs to the last category and it hasn’t even been published yet. Its central conclusion is that since 1980, firms have been able to expand substantially the margin between marginal cost and price.
The authors, Jan De Loecker and Jan Eeckhout, are both esteemed economists and are not timid at recognizing the implications of their research finding. They believe that the increasing market power that this expansion of the margin demonstrates is responsible for the major economic changes we have seen since then, including, “1. decrease in labor share; 2. decrease in capital share; 3. decrease in low skill wages; 4. decrease in labor force participation; 5. decrease in labor flows; 6. decrease in migration rates; 7. slowdown in aggregate output.”
This could be the blockbuster economic theory breakthrough of our time … or it could be the economics version of a late-night TV commercial.
The research is data-driven, and the authors are forthcoming in explaining the strengths and weaknesses of the data on publicly traded firms that they used. There is no such thing as perfect data in macroeconomics and they have done an admirable job in structuring the statistical data so that it could support an economic theory argument.
Some questions about the conclusion remain, though. The first is rooted in basic arithmetic. There are two possible reasons why there could be an increase in the margin between cost and price. The first is an increase in price; and the second is a reduction in cost. The authors prefer the price explanation, which is the accepted theory of both economists and government regulators. There is good reason for…