Three Essays in the Role of Firms in Macroeconomics

This thesis consists of three chapters covering the role of firms in macroeconomics. The first chapter focuses on the labour share of income. Theoretical and practical issues surrounding measurement are discussed and novel empirical applications are explored. Utilising household survey data, new time series are constructed for full-time equivalent employees and counter-factual proprietor labour income. These series used to generate estimates of the labour share which constitute a conceptual improvement over the existing official UK methodology. Additionally, the classification of firm intellectual property investment and its implications for the measurement of the labour share are examined. The results shown that the careful treatment of proprietor income and intellectual property products suggests there has been little to no decline in the UK labour share. The second chapter explores the role of rising markups on optimal capital taxation. The Chamley-Judd result states that the taxation of capital income should converge to zero in the long run. However, recent empirical studies suggest that average firm-level markups have increased substantially over the past two decades; a direct implication is a rise in the share of aggregate profits. The zero long run optimal capital tax result is revisited in this context. A structural model of firm entry with monopolistic competition is developed where the fiscal authority cannot differentiate between aggregate profits and productive capital income. It is shown that when markups are sufficiently high, aggregate profits in equilibrium become large enough such that it is optimal to positively tax capital income in the long run - beyond a certain threshold the efficiency gains from taxing lump-sum profits outweigh the distortion caused by inadvertently taxing future investments in physical capital. The third chapter examines the comovement problem in the context of firm dynamics. Empirical observations show that consumption and investment are both pro-cyclical over the business cycle. However, investment shocks in structural models typically generate opposing responses for consumption and investment. This paper develops a model of firm entry with business churn and endogenous overhead costs which produces the appropriate unconditional comovement between consumption, investment, hours and output. Moreover, this paper demonstrates that CES production technology with an elasticity of substitution well below unity, in line with empirical estimates, generates the observed comovements between macroeconomic aggregates on impact and improves model fit in terms of second moments.