Startups Remain Stuck: Job Creation From New Establishments Lags

Some economists think a decline in dynamism is contributing to low productivity growth

By Jeffrey Sparshott of the WSJ. The monthly employment report comes out tomorrow and although unemployment is low, the percentage of 25-54 year-olds employed is still below what it was in December 2007, when the last recession began. I will post something on this tomorrow after the report is out.

So this article discusses why that might be the case. It also mentions "allocative efficiency," something I cover in both micro and macro. When the quantity of a good makes the marginal benefit equal to the marginal cost, we have allocative efficiency. This article suggests not enough resources are being put into new businesses, that is, the quantity of startups is too low.

Here are excerpts from the article:

"During the latest expansion, new establishments have accounted for a little more than 11% of all new private-sector jobs created in the U.S. During the 1990s, the figure was 15%, according to Labor Department data released Wednesday.

That may seem a small shift, but those few percentage points add up to nearly 300,000 jobs a quarter.

The startup slowdown also suggests a loss of dynamism across the broader U.S. economy, with Americans either less willing or less able to launch a new venture, and a decline in the kind of churn that leads to greater opportunity for workers and rising productivity.

“The evidence suggests that the decline in dynamism is reason for concern and sheds light on debates about the causes of slowing productivity growth,” economists Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda wrote in a February 2017 discussion paper for the Federal Reserve.

The latest Labor Department report tracks job creation from existing and new establishments. It shows that establishment “births” accounted for about 866,000 new jobs in the third quarter of 2016. That works out to about 11.3% of all jobs created during the period."

"Separate data from the Commerce Department show the trend goes back even further. The share of private firms less than a year old has dropped from more than 12% during much of the 1980s to only about 8% since 2010.

Why would that hurt productivity? Mr. Decker and his colleagues focus on allocative efficiency, or “the continual movement of resources to their most productive uses.” A decline in startups suggests that capital and labor aren’t getting moved to enough fast-growing young companies.

“Our findings imply that…declining business dynamism since 2000 is likely a drag on American living standards,” the paper said. “Moreover, our findings suggest a reevaluation of the productivity slowdown debate, which has until now focused on technological versus measurement explanations.”

Not everyone buys that explanation.  A San Francisco Fed paper by economist Huiyu Li finds that incumbent firms contribute significantly to growth.

“In sum, focusing on the detrimental effects from fewer new businesses on aggregate productivity growth may undervalue the strong innovation that existing firms contribute to the economy,” Ms. Li wrote.

Even so, a decline in startups raises other red flags for the economy, including the possible effects of regulations, an aging population, a growing divide between cities and rural areas, outsourcing or simply a loss of entrepreneurial spirit."Fits and StartsShare of job gains from new establishments