Our article has been in circulation as a working paper in various versions for maybe 2 or 3 years, and during that time the general topic of declining entrepreneurship and dynamism generally has become pretty widely known outside of academia. I have blogged on this stuff too many times to link. We're also already working on a follow-up study that looks at things like high-growth entrepreneurship, differences between public and private firms, some specific sectors, and trends in the nature of "shocks" hitting firms. I've blogged a bit about that newer paper, here and here; it is still in early stages.
In the JEP paper, we describe some data on the dynamics of young firms, how the growth rate distribution of firm cohorts evolves as they age, the role of young firms in productivity growth (see also here), and some long-term trends that are pretty widely known now. We do some simple accounting exercises to determine the degree to which composition effects are driving long-term trends in gross job flows. Some basic insights and findings:
- New firms experience a strong "up or out" dynamic--a few grow very quickly and survive, while the rest shrink and fail (see Figure 1 in the paper, below, click for larger version). As such, many of the jobs created by startups are destroyed in short order. This is pretty well known in this literature.
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- The growth rate distribution of young firms is highly skewed, with some firms growing very quickly and pulling up the mean. Among older firms, the growth rate distribution is symmetric with a mean and median of zero (see Figure 2 in the paper).
- Startups, and reallocation more generally, play a huge role in productivity growth. We discuss this in some detail, and I covered it a bit here; we really just review existing research.
- In shift-share analysis, the aging of the firm distribution "accounts" for about one third of the decline in gross job flows. Changing industry composition (away from manufacturing and toward retail and services) works the "wrong way", since we have moved toward more activity in more volatile industries. When we absorb age, size, and industry composition effects, we "explain" about 15 percent of the decline (note, though, that this is not causal analysis). This means that the decline is happening within cells, and a good explanation for it has yet to be found. As such, policy implications of what we know right now are unclear.
- The decline in dynamism is relentless, indefatigable, indisputable, and undeniable (Yorke 2006), and it is ubiquitous across industry and geography. This suggests that simple policy explanations may not get us very far.
- We conceptualize the question in terms of standard models of firm dynamics, which would suggest that a decline of this kind means either (a) a decline in the volatility of shocks that drive firm outcomes, or (b) a decline in the responsiveness of firms to these shocks (which could be driven by, e.g., technology or policy changes). Our newer working paper sheds some light on this problem.
We do not yet fully understand the causes of the decline in indicators of business dynamism and entrepreneurship, nor in turn, their consequences. Improving our understanding of the causes and consequences should be a high priority. . . .
The declining pace of startups, job creation, and job destruction is mirrored in other measures of the dynamism of American society. . . . Taken together, there appears to be less scope for the US economy to adjust to changing economic conditions through the migration of workers, the reallocation of jobs across producers, and through the switching of workers across a given allocation of jobs.
The paper is reasonably short, nontechnical, and (I think) focused enough to be worth looking through. A lot of this literature consists of papers where you drink through a fire hose of data, but here we've tried hard to be concise (thanks in large part to excellent editors). We started with dozens of figures and tables and whittled down to just a few. When I first encountered the firm dynamics literature, I was blown away by the richness and diversity of market economies that shows up in the administrative micro data. Hopefully this paper will get others thinking about the topic.
I'm very excited about this paper. It builds a lot on work that has been done by people other than me, primarily including my coauthors John Haltiwanger, Ron Jarmin, and Javier Miranda, but also Stephen Davis, Lucia Foster, Chad Syverson, and others whom are listed at the end of the text. These people, along with others like Erik Hurst, have done and are doing a lot of really interesting work in empirical firm dynamics. In my view this is the best stuff happening in macro these days, as it utilizes large amounts of micro data on firms and establishments to explore big macroeconomic questions. For my involvement in this project I thank my generous coauthors and a series of consecutive luck shocks.