Data, company entry, etc.

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Jan Eeckhout of UPF Barcelona and Laura Veldkamp of Columbia develop a theoretical framework in which data reduces business uncertainty. They identify two competing channels through which access to data affects market power and firm margins. In the first case, the data helps companies to better predict consumer demand, encouraging them to increase production for a given level of investment and thereby reduce prices and margins. In the second case, the data reduces the uncertainty surrounding investment decisions, encouraging firms to make larger investments that reduce their marginal costs and increase profit margins. The authors find that the balance of these two channels depends on the relative efficiency of firms’ investments and their pricing of risk. Their model predicts that the increasing volume of data will reduce margins at the product level, but increase them at the company and industry level. The authors suggest that data generally improves welfare but can amplify the costs of market power.

Official data on firm entry and exit are released with long lags, making it difficult to identify firm exit and entry trends in real time. During the pandemic, many economists have measured business entry using data on applications for employer identification numbers with the IRS, which are released more quickly. Comparing applications with the count of actual business entries from the Bureau of Labor Statistics, Ryan A. Decker of the Federal Reserve Board and John Haltiwanger of the University of Maryland find that the strong increase in applications in the second half of 2020 proved to be a good predictor of entry into activity. While business exits also increased at the start of the pandemic (which was also expected based on non-traditional data like cellphone tracking), inflows eventually exceeded exits in 2020. The authors note that official statistics, such as underlying GDP and the establishment survey’s monthly employment report, do not capture real-time firm entry and exit. They conclude that “the timing of measuring business entries and exits remains an important limitation of the US statistical system”.

Very poor schools were more likely to walk away during the pandemic, and their students suffered greater learning losses when they did, find Dan Goldhaber of the University of Washington and his co-authors. Using data from 2.1 million students in schools across the United States, the authors compare actual and expected growth in student achievement during the pandemic. In school districts that were mostly remote in 2020-21, high-poverty schools experienced 50% more achievement losses than their low-poverty counterparts. In in-person districts, on the other hand, these gaps widened less for reading and not at all for math. The authors also show that most of the widening achievement gap by race during the pandemic occurred not because black and Hispanic students fell behind their peers within the same school, but because they attended schools that were more negatively affected by the pandemic. Filling these gaps will not come cheap. By comparing the share of the school year needed to compensate for student learning losses with the share of the annual school budget they received in federal aid, the authors estimate that most remote and very poor districts should spend almost all of their federal aid on school recovery alone.

Chart of the week: Inflation drops slightly

CPI rises significantly but begins to fall

“Three major imbalances contribute to an overheated economy and high inflation. First, the effects of the pandemic have dramatically increased demand for certain spending categories, including durable goods and housing. This increase in demand is occurring as supply in these sectors is negatively impacted by the pandemic,” said John C. Williams, president of the Federal Reserve Bank of New York.

“The second major imbalance concerns the labor market, where aggregate demand far exceeds existing supply. The job vacancies-to-unemployment ratio is nearing its all-time high, workers are quitting their jobs at a record rate, and employers are raising wages. This hot labor market is also linked to the imbalance between demand and supply for goods and housing, with companies seeking to hire more workers to meet the high demand. And labor shortages and rising labor costs are contributing to price pressures on a wide range of goods and services.

“Finally, global supply and demand imbalances have also contributed to supply chain issues that have affected availability and shipping costs, as well as a variety of inputs into production, including semiconductor chips used in car manufacturing The war in Ukraine and recent shutdowns in China have further restricted the global supply of goods and raw materials, including food and energy.

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