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.