Declining business dynamism: Implications for productivity?

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Declining business dynamism: Implications for productivity? By Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda. The last few decades have seen a decline in business dynamism, as measured by indicators such as new firm formations, worker flows, and job creation and destruction. This is a potentially worrisome trend because an important driver of productivity growth is the reallocation of resources from less productive to more productive firms. Ryan Decker of the Fed, John Haltiwanger of the University of Maryland, and Ron Jarmin and Javier Miranda of the U.S. Census Bureau use firm-level data for the entire U.S. economy to explore whether a fall in business dynamism has resulted in a decline in productivity growth. The authors first review the significant fall in business dynamism over time. For example, as Figure 1 shows, there is a clear downward trend in the rate of startups (new firms), and a slower decline in the rate of firm exits. Similarly, over the last several decades, the share of employment at young firms has dropped from 20 percent to 10 percent. They also review recent evidence on declining high-growth firm activity (especially by young firms). Figure 1: Annual firm startup and exit rates, U.S. private non-farm sector, 1981-2013 Declining business dynamism: Implications for productivity? (more…)