Research
Working Papers
Worker Quality, Matching and Productivity Slowdown (Shujiang Cao, Shutao Cao), 2025
Abstract
Measured aggregate productivity and the income share of top earners are strongly and positively correlated in the Canadian data. Productivity slowdown since the early 2000s was accompanied with a flattening income share of top earners. Motivated by these facts, we study the role of firms' top-paid workers and worker matching in accounting for the slowdown of measured total factor productivity. We first estimate total factor productivity for Canadian firms in the period of 2003-2015, taking into account the assortative matching between top workers and non-top workers. Measured total factor productivity consists of the Hicks-neutral technology and the quality of top workers. Our estimation suggests that measured aggregate total factor productivity declined from 2003 to 2015, in line with that estimated by the statistical agency. The decline of measured productivity is entirely accounted for by the declining quality of top workers, while the Hicks-neutral technology improved. Both the within-firm changes and the cross-firm reallocation of top-worker quality are important in contributing to the decline of overall top-worker quality. We also discuss possible causes of declines in the quality of top workers, e.g., the emigration of top talents as studied in recent literature.The impact of uncertainty on two-tiered labor markets (Shutao Cao, Enchuan Shao, Pedro Silos), 2021
Abstract
This paper studies the impact of higher aggregate uncertainty on labor markets where jobs with strong employment protection coexist with temporary contracts. We develop a search and matching model where firms and workers choose the type of contract. The model allows for endogenous separations and job-to-job transitions. We show that in the data, times of heightened uncertainty correlate with a higher share of temporary workers, a lower wage inequality between permanent and temporary jobs, and a slight increase in unemployment. Our model is consistent with these facts. Higher uncertainty increases the option value of temporary contracts relative to permanent contracts, changing the composition of the labor force but with minor changes in overall employment levels.Accounting for productivity growth in a small open economy: Sector-specific technological change and relative prices of trade (Shutao Cao), 2017
Abstract
Many economies experienced a slowdown of measured productivity in the 2000s, coinciding with the commodity price boom. We use a multisector growth model for a small open economy to quantify the contribution of sector-specific technology and relative prices of trade to productivity slowdown. We show that the effective aggregate total factor productivity consists of two components: the weighted average of sector-specific technology, and the weighted averaged of domestic-export price ratios which reflect export costs. This extends the Domar aggregation result of Hulten (1978). When calibrated to the Canadian data, the model suggests that productivity slowdown was mainly attributed to two sectors: commodity; machinery and equipment. Cross-country data show that, in two thirds of countries that experienced productivity slowdown, slower productivity growth in sectors serving domestic market was a dominant factor, while in the other one third, reduced domestic-export price ratio played a major role.Work in Progress
Effects of Canadian Emergency Wage Subsidy program (with Wei Dong)
Monetary Policy and Fiscal Policy over the Covid-19 Pandemic in Canada (with Yahong Zhang)
Peer-reviewed Articles
Production Networks and the Macroeconomic Impacts of Commodity Price Shocks (Shutao Cao, Wei Dong)
Canadian Journal of Economics, 58: 690-715, May 2025
Abstract
We examine the macro implications of commodity price shocks in a small open economy model with input-output linkages for a commodity-exporting small open economy. In the model, fluctuations in commodity prices have impacts on aggregate output not only through resource reallocation, currency value changes and monetary policy reaction but also through upstream and downstream input-output linkages (both domestically and with the rest of the world). We show the importance of input-output linkages as a shock transmission mechanism. We find that production linkages with the rest of the world play a significant role in amplifying the shock's aggregate impact.The Welfare Cost of Inflation Revisited: the Role of Financial Innovation and Household Heterogeneity (Shutao Cao, Césaire A. Meh, José-Vı́ctor Rı́os-Rull, Yaz Terajima)
Journal of Monetary Economics, 118: 366-380, March 2021
Abstract
The money-consumption ratio increases with age and decreases with consumption, and the recent era of low interest rates has seen a large increase in the aggregate money-consumption ratio. We estimate an overlapping generations model with money for transaction purposes for the age effects and the extent of financial innovation using aggregate and household-level money holdings. We then assess the welfare cost of a 3 percentage point increase in inflation, incorporating the cost from the redistribution of non-money nominal wealth. We find that the welfare costs are 13% of one-year consumption and are borne mostly by the poor and the old.Credit constraints and productivity of SMEs: Evidence from Canada (Shutao Cao, Danny Leung)
Economic Modelling, 88: 163-180, June 2020 (The best paper award 2020, Economic Modelling)
Abstract
To what extent firms are constrained by external credit is usually unobserved in commonly used firm-level data. We use a survey of financing among Canadian small and medium-sized enterprises to measure the likelihood of a firm being constrained by credit. We find that firm size, current debt-to-asset ratio and cash flow are robust indicators of being financially constrained, while long-term debt to asset ratio is not a significant indicator of credit constraints. We then estimate the firm-level total factor productivity, taking into account the measured credit constraints. Omitting credit constraints leads to an upward bias of productivity estimates, by 4 percent. In addition, we find no strong evidence that suggests credit constraints lead to slower productivity growth. Finally, we confirm that both investment and employment growth are negatively affected by the measured credit constraints.Trends in Firm Entry and New Entrepreneurship in Canada (Shutao Cao, Mohanad Salameh, Mai Seki, Pierre St-Amant)
Canadian Public Policy, 43 (3), July 2017
Abstract
Since the early 1980s, the firm entry rate and the rate of new entrepreneurship have trended downward in Canada. This article documents these trends and discusses potential explanations. A shift-share analysis suggests that industrial and demographic structure changes cannot explain these long-term trends, although population aging accounts for part of the decline in new entrepreneurship since around 2000. The article discusses other factors that could contribute to the downward trends: increased industrial concentration, changing labour market conditions, increased college wage premium, higher student debt, and government regulation. Some of these may be important, but more research is needed before firm conclusions can be reached.Real GDI, productivity and the terms of trade in Canada (Shutao Cao, Sharon Kozicki)
Review of Income and Wealth, 63: S134-S148, February 2017
Abstract
In this paper, a quarterly dataset of productivity is built for the Canadian business sector, and the Diewert and Yu (2012a) estimates of annual productivity growth are revised and updated to reflect changes in the new Canadian system of national economic accounts. The quarterly data are then used to study the contribution of total factor productivity and the terms of trade to growth of real gross domestic income. In most years of the 2000s, the contribution of the terms of trade became significant in real income growth, whereas that of total factor productivity growth was stagnant. Improvement in the terms of trade arises froma decline in the import price index and an increase in the export price index.Pricing-to-market, currency invoicing and exchange rate pass-through to producer prices (Shutao Cao, Wei Dong, Ben Tomlin)
Journal of International Money and Finance, 58: 128-149, November 2015