Friday, September 19, 2014

"Disruption" disrupted

At The Atlantic, Justin Fox compares the popular obsession with "disruption" to findings from research on declining dynamism, including papers I've been on.

Nowadays every corporate executive wants to disrupt; the word has become a mark of forward-thinking decisiveness—though it is sometimes attached to strategies that are more about cost-cutting than game-changing. And in Silicon Valley, belief in disruption has taken on a near religious tinge. All that disrupts is good; all that stands in disruption’s way (such as, say, San Francisco taxi companies or metropolitan daily newspapers) deserves to perish. . . . 
What may be even more extraordinary, however, is the growing disjuncture between all this talk of disruption and its actual practice—at least so far as we can measure it. Thanks to data that the Census Bureau began releasing a decade ago, economists can now track what they call “business dynamism” in ways they couldn’t before. As researchers have dug into these numbers, they’ve found that most metrics of dynamism and upheaval in American business have actually been declining for decades, with the downturn steepening after 2000. Fewer new businesses are being launched in the United States, the average age of businesses is increasing, job creation and job destruction are on the wane, industries are being consolidated, and fast-growth businesses are rarer.

The article also describes results from, but does not cite or link to, unpublished work by coauthors and me on the post-2000 decline of high-growth firms.

Sunday, September 14, 2014

Millennials and finances

From Deseret News:
Millennials may have their elders beat on the computer, but they have a few things to learn about finances.

Some data on those elders:
In the 2013 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), workers aged 55 and older said the following about their retirement savings:
  • 60% have less than $100,000 in retirement savings
  • 43% have saved less than $25,000
  • 36% have saved less than $10,000

Saturday, September 13, 2014

Rognlie on productivity and employment

Matt Rognlie is one of those people who really knows how to reason from a model, and he can do so quantitatively by using compelling rules of thumb and back-of-the-envelope reasoning. Google around for some good examples.

In the comments to this post, Matt writes:

Let's ignore non-labor sources of income for a moment. Then, in a very simple static model of labor supply, unless substitution effects are much stronger than income effects (which would imply a counterfactual secular rise in labor hours), a fall in the level of real wages does not imply a decline in labor hours. If we adopt cancellation between substitution and income effects as a baseline, then hours should be constant regardless of the real wage. Not clear why a fall in productivity, say, should translate into a decline in hours. 
Dynamically, there is a similar invariance of labor hours to shifts in the long-run level of productivity, but there may be some intertemporal substitution of labor depending on the (1) real interest rate vs. the (2) rate of expected real wage growth. Specifically, labor supply today is increasing in (1) - (2), though the actual amount of intertemporal substitution is determined by the Frisch elasticity, which does not seem to be that high in practice. The recent recession involved declines in both (1) and (2), maybe with an overall decrease in (1) - (2), but (I don't think) quantitatively enough to get a large decline in labor supply. Intertemporal substitution is pretty problematic as a mechanism in general, since the people whose employment fell the most tended to be the ones who don't have much ability to smooth wages over time and thus can't engage in much intertemporal substitution. . . . 
Anyway, I could go on and on about the ways in which a classical labor supply model is not a good description of reality, and we'd probably agree there. My point is to emphasize that since it's hard to justify the decline in employment in a frictionless model, there are probably some substantial labor market imperfections at work here. And a lot of the most plausible imperfections suggest that we should pursue policies to boost aggregate demand, if only as an application of the theory of the second best.

To be clear, when I hint at the idea that trends in firm dynamics could be affecting the business cycle, I'm not really thinking about a productivity channel. I'm thinking in very rough partial equilibrium terms about the simple fact that high firm growth rates are increasingly rare, so I'm left wondering where we'll get the labor demand "needed" to accommodate growth in the labor force (and also, as a side issue, wondering whether we need the high rates of excess reallocation that we used to see). That's all pretty non-rigorous, basically lump-of-labor reasoning, so it's a long way from being ready for prime time. I don't know how to build a model of this yet, because we still are mostly ignorant about what's driving the trends. But my view is this: either these trends in firm dynamics matter for the cycle or they don't. If they don't, I'm very curious about why they don't. If they do, they may complicate the AD/AS story.

Friday, August 22, 2014

The Great Unskewing

One way to think about the dynamics of jobs and firms is to examine the distribution of firm growth rates. The high pace of job reallocation we observe implies that firms vary considerably in employment growth rates; some firms are shrinking (or closing their doors), some are operating year after year without changing the size of their workforce, and some are rapidly expanding. We basically know about the first moment of this distribution (the mean or median), which must be slightly positive to accommodate growth of the workforce over time. The second and third moments--the width of the distribution and the degree to which it is skewed up by high-growth firms--are measures of dynamism.

Suppose we sliced the distribution of firms by firm age. The figure below is from our recent JEP paper (click for larger image):

Figure from Decker, Haltiwanger, Jarmin, and Miranda (2014a)

Here you can see the Geico "everybody knows that" fact about young firms "accounting for" aggregate job growth. As a cohort of firms ages, its growth rate distribution converges on zero--so old firms as a group do not create jobs in aggregate (more on cohort dynamics here and here). The second moment can be seen here too: young firms vary widely, but firm cohorts see their growth rate distribution narrow as they age (but note that the distribution never becomes degenerate--there is still lots of churning among old firms). In this sense, old firms are less dynamic than young ones. Finally, observe that young firms are skewed toward high growth. The gap between the median firm and the firm at the 90th percentile is larger than the gap between the median firm and the firm at the 10th percentile.

As part of the general aging of firms (though not entirely because of it), the aggregate firm distribution increasingly looks like the distribution of old firms. The next figure (from a current working paper) plots the gap between the 90th percentile and the 10th percentile firm, for all firms and for only continuing firms (i.e., no entry or exit):

Click for larger image
Figure from Decker, Haltiwanger, Jarmin, and Miranda (2014b)

Observe that this measure of the second moment--the dispersion of firm outcomes--has been falling, so the firm distribution has been tightening up. This might seem like a good thing, particularly if the tightening is happening because fewer firms are shrinking. This is basically the reason that some people are skeptical about the need to be concerned about declining dynamism. Who cares if dispersion is falling? A lot of that churning is unnecessary anyway. The next three figures examine the third moment--skew--by comparing the gap between the 90th and 50th percentiles to the gap between the 50th and 10th percentiles.

Figures from Decker, Haltiwanger, Jarmin, and Miranda (2014b)

While it is true that the bottom of the firm distribution is pulling up, the top is falling down more quickly. The US economy is unskewing, beginning to look more and more like the old timers. When we look at all firms in aggregate or just at the high-tech sector, it looks like the distribution could be totally symmetric soon. Among young firms, there is still a high degree of skew but it is falling (keep in mind that age-0 firms necessarily have positive growth rates, which gives the young firm distribution a boost).

The unskewing of the firm distribution means that we are seeing fewer high-growth firms (or, equivalently, the bar for what constitutes "high growth" has fallen). In partial equilibrium, at least, it's very hard to interpret that result as good news. It is likely to affect how the economy responds to the business cycle, and over time it could have consequences for productivity. For now these are speculative claims, but this is a growing literature. A new paper by Davis and Haltiwanger finds evidence that lower dynamism causes lower employment, not to mention slower wage growth. In my view this evidence greatly complicates the recession stories that dominate the econ blogosphere. It may not be a simple Econ 101 aggregate demand story.

Friday, August 8, 2014

Comment on Cowen

My comment on this post by Tyler Cowen (it never made it through moderation):

- I have been amazed at how many econ journalists and economist bloggers were not already aware of these trends. The Hathaway and Litan briefs have not revealed new facts; just pushed on them in some very helpful ways. Academics have known the basic facts (declining entrepreneurship, aging firms) for some time. The general decline in entrepreneurship was documented in a working paper that started circulating almost 3 years ago (here) and in various Kauffman briefs. Over a year ago I blogged about the aging of the firm distribution. That post had very little traffic even by this blog's standards, but I see now that it wasn't because the topic doesn't interest people.
- The Yglesias argument is just speculation. We've had a hard time finding evidence for it. The aggregate times series should make anyone skeptical. If he wants to push this story, he should use regional variation (for a start). 
- This isn't just about subsistence entrepreneurship, the "orange sellers" and mom-n-pop shops. At least starting around 2000, high-growth entrepreneurs took a hit too. 
- While it's true that the datasets on which these findings are based currently end in 2011, the establishment birth data we see in the BED (which extends through 2013q4) are suggestive (though not conclusive, since establishments aren't firms). Don't expect a massive rebound in new firm formation on the heels of the Great Recession.

The last two points are responses to other comments on the post. This is a good example of an issue on which the blogosphere (or, at least, the blogs with readers) and journalists are way behind academia, though there are a handful of journalists who have been on the case for several years.

Sunday, August 3, 2014

Entrepreneurial decline: Mom-n-pop or high-growth?

A lot of people respond to data on declining rates of entrepreneurship by suggesting that this is about the decline of mom-n-pop shops associated with retail sector consolidation. From a recent paper:

Most business startups exit within their first ten years, and most surviving young businesses do not grow but remain small. However, a small fraction of young firms exhibit very high growth and contribute substantially to job creation. 

If we're just seeing fewer slow growers and likely failures, and if that "small fraction" of young firms that accounts for so much job creation has been unaffected, then less entrepreneurship isn't alarming. Big firms pay better than small firms, and the rise of big box retail has probably made the economy more productive. So Noah Smith and others have pushed back against the growing chorus of declining dynamism alarmism.

In a preliminary, incomplete working paper, coauthors and I attempt to determine whether the decline of entrepreneurship has involved high-growth firms. One way to do this is to study the distribution of growth rates of young firms (i.e., firms age 5 or less). Figure 10 from that paper is below (click for larger image):

Figure from Decker, Haltiwanger, Jarmin, & Miranda (2014)
"The secular decline in business dynamism in the U.S."

The lines indicate the employment-weighted 90th percentile of employment growth rates. That is, only 10 percent of young firm employment is at firms with growth rates that exceed the red line (the series are actually HP filtered). For young firms, the growth rate required to be in the 90th percentile was somewhat constant during the 80s and 90s, suggesting that the decline in entrepreneurship we see in those decades may not have been affecting high-growth firms. But starting around 2000, the top of the growth rate distribution falls. We take this as suggestive evidence that high-growth entrepreneurship began declining around 2000. You can also see that mature firms had a fairly constant distribution before 2000, so that the overall trend was largely a composition effect.

So at least by blog standards I think it's fair to assume that the pre-2000 decline of entrepreneurship may have been largely about the death of the mom-n-pop, but since then even high-growth entrepreneurship has taken a hit. It turns out that the year 2000 is significant for other measures of dynamism, too. The high-tech sector, the information sector, finance, and publicly traded firms all had turning points around that time (see Figure 6 from the working paper), with flat or rising rates of job reallocation and within-firm volatility prior to ~2000 and declining dynamism after ~2000 (and dynamism trends aren't the only thing that changed around 2000; an example). So the story of declining dynamism in the US is partly a story of convergence, with roughly the year 2000 marking a point at which classes of firms that were previously unaffected by the aggregate patterns finally joined the trend.

Friday, August 1, 2014

"Economic dynamism and productivity growth"

Dietz Vollrath has a nice response to our work on dynamism. Basically his argument is that the decline in dynamism doesn't seem to be affecting aggregate productivity. Yesterday I posted a comment at his blog, but comment moderation over there seems to be on hiatus, so I'm reposting my comment here:

In the paper, we are pretty careful not to draw conclusions about whether this is a good thing or a bad thing, since (as you suggest) it’s unclear what is optimal in terms of young firm activity and job flows. A lot of journalists have looked at our work and related work and run with stories about doom and gloom, but we’re not ready to draw any kind of conclusions. 
Likewise, I think it’s a little premature to draw the conclusions you draw about productivity. First, just looking at the aggregate data without a plausible counterfactual is, as you know, pretty tricky. I know you’re aware of the evidence on productivity and reallocation (which we review in the paper); I think our prior, at least, should be that this matters. 
Second, the Fernald chart you include is not inconsistent with a connection between productivity and dynamism. Note the trend break in the early 2000s. This is consistent with the dynamism data in Figure 3 from our paper–observe that the dynamism trend is pretty flat during the 1990s. Moreover, as we show in some newer work, dynamism measures for, eg, the high tech sector and public firms actually increase until the early 2000s, at which point they head downward (see and the paper linked therein). It’s not unreasonable to assume that strong dynamism in key sectors helped boost productivity in the 1990s, and once those sectors experienced reversal in the early 2000s the aggregate trend moderated somewhat. 
As a side note, you mention retail. As we discuss in the paper, there is lots of evidence that consolidation in retail has been productivity enhancing. So, certainly, there are countervailing trends at work.