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
The authors explore the potential causes and consequences of this declining dynamism, and have two main findings. First, using revenue per employee as a measure of productivity, the authors show that the gap in productivity between the most and least productive firms has widened over time. This widening is most apparent in the information sector, a sector that has historically been an important source of productivity growth. Widening dispersion in productivity is potentially a sign that firms are facing increasing frictions in adjusting to their appropriate size, or that the least productive firms are not catching up to the most productive firms as quickly as they used to.
Second, they show that the link between a firm’s level of labor productivity and its rate of employment growth has been getting weaker over time. Whereas in the past more productive firms in the same industry expanded employment while less productive firms contracted, today this is less true. This decline in reallocation from less productive to more productive firms is likely holding down overall productivity growth.