Wednesday, July 30, 2014

The role of entrepreneurship in US job creation and economic dynamism

That is the title of my first quarter-of-a-publication, in the Journal of Economic Perspectives. The issue includes symposia on entrepreneurship, development, and academic production, as well as some other content. JEP articles are always ungated, courtesy of the AEA. I suspect that the excellent Timothy Taylor will do a full write-up of the issue soon. This particular journal is meant for generalists, and as such the papers tend to be largely nontechnical and digestible (and interesting!).

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.

I do not own this image

- 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 write,

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.


  1. Declining dynamism is not necessarily a negative factor in economic efficiency. Restaurants have historically accounted for a large share of business startups and failures. I would expect that that share is declining as franchises replace mom-and-pop eateries - the franchisors have considerable expertise in siting studies, market testing, etc. that greatly improve the likelihood that new franchisees will succeed. Fewer exits means fewer opportunities for others to enter. Franchisors also bring expertise in productivity enhancement. Not that I'm enthusiastic about Olive Gardens displacing family-run Italian restaurants, but it's not efficiency that I think might be lost...

    1. Yes, I agree. In the paper, we explicitly note that there is evidence that the consolidation of the retail sector has boosted productivity; there is a literature on this. More generally, we make no claims about the efficiency consequences of declining dynamism.

      As for aggregate trends in entrepreneurship, we argue in the paper that the key question is whether high-growth entrepreneurs have disappeared. The decline of mom-n-pop businesses need not hurt productivity or labor markets. In the newer research that I mention in the post, we find that high-growth young firms were doing fine until around 2000, at which time the top end of the growth rate distribution for young firms starts to decline. So in recent years, at least, it does not seem to be only mom-n-pop entrepreneurs that are going away.