Aggregate Implications of Changing Sectoral Trends / Andrew Foerster, Andreas Hornstein, Pierre-Daniel Sarte, Mark W. Watson.

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Foerster, Andrew

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25867.Publication details: Cambridge, Mass. National Bureau of Economic Research 2019.Description: 1 online resource: illustrations (black and white)Subject(s):

E23 - Production

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Abstract: We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and labor growth lead to changes in GDP growth that may be as large as three times these sectors' share in the economy. We find that trend GDP growth has declined by more than 2 percentage points since 1950, and that this decline has been primarily shaped by sector-specific rather than aggregate factors. Sustained contractions in growth specific to Construction, Nondurable Goods, and Professional and Business and Services make up close to sixty percent of the estimated trend decrease in GDP growth. In addition, the slow process of capital accumulation means that structural changes have endogenously persistent effects. We estimate that trend GDP growth will continue to decline for the next 10 years absent persistent increases in TFP and labor growth.

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Previous	nber w25864 Accumulation of Human and Market Capital in the United States, 1975-2012: An Analysis by Gender /	nber w25865 Management and Shocks to Worker Productivity /	nber w25866 Expectations, Wage Hikes, and Worker Voice: Evidence from a Field Experiment /	nber w25867 Aggregate Implications of Changing Sectoral Trends /	nber w25868 Disentangling Global Value Chains /	nber w25869 Understanding Weak Capital Investment: the Role of Market Concentration and Intangibles /	nber w2587 Market-Based Debt-Reduction Schemes /	Next

May 2019.

We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and labor growth lead to changes in GDP growth that may be as large as three times these sectors' share in the economy. We find that trend GDP growth has declined by more than 2 percentage points since 1950, and that this decline has been primarily shaped by sector-specific rather than aggregate factors. Sustained contractions in growth specific to Construction, Nondurable Goods, and Professional and Business and Services make up close to sixty percent of the estimated trend decrease in GDP growth. In addition, the slow process of capital accumulation means that structural changes have endogenously persistent effects. We estimate that trend GDP growth will continue to decline for the next 10 years absent persistent increases in TFP and labor growth.