Saturday, May 10, 2014

Declining U.S. dynamism: Story, or non-story?

Everyone is talking about the new Brookings study that shows that the U.S. economy is becoming less "dynamic". The study echoes an earlier paper by Decker et al. Basically, there are two measures of "dynamism": 1. firm churn, and 2. job churn. Firm churn (a name I just made up) is how many businesses are replaced by new businesses, while job churn (a name I did not make up) is how many people move jobs. Both firm churn and job churn are decreasing. Here are the pretty graphs from Brookings:

What's going on here? Before we start casting around for political explanations, let's think about how this could be a natural result of changing technology.

One big thing that has happened in America over the last 35 years is the coming of large chain stores and restaurants. Mom-and-pop businesses have vanished as big-box retail, and later Amazon and other e-commerce sites, have taken over. That would tend to increase firm exit and decrease firm entry. Ryan Decker confirms that employment at large firms has been increasing since the early 80s.

Should we be worried about that? Many people over the years have bemoaned the death of the mom-and-pop store or the local restaurant, but I'm not sure we should be too concerned. Go visit a poor country, and you'll see that every other family has a food stand or little clothing stall, etc. That kind of "entrepreneurship" takes guts and ingenuity, but it's born out of hardship, not opportunity. The birth and death of small family businesses is one kind of "economic dynamism", but not really the kind that leads to increasing living standards or technological progress. In the U.S., it's not clear from Brookings' data how much high-growth entrepreneurship has changed. 

Another big thing that has happened is the overall productivity slowdown, as documented by Robert Gordon and others. That will tend to mean that fewer big new industries are appearing, as a percentage of the existing number. That's going to reduce firm churn. Of course slowing productivity growth is something we should be worried about, but it's not clear what can be done about that. It's also not clear how much of slowing productivity growth might actually be caused by reduced dynamism, though the global nature of the productivity slowdown hints that it's not the biggest factor.

How about job churn? Less firm churn will tend to mean less job churn, so that will account for some of the decrease in job-hopping. Health care "job lock" might be a factor. Population aging probably accounts for some of it (old people hop jobs less). Should we be worried about reduced job churn, above and beyond reduced firm churn? Maybe not, according to John Haltiwanger (who heads the team of which Decker is a part).

Anyway, I think that before we start running around blaming "big government", or increased American risk aversion, or anything like that for the decline in dynamism, we should wait for more careful analysis of the reasons for the trend (and Haltiwanger, Decker, et al. are on the job). Less "dynamism" could turn out to be an interesting non-story.

(Thanks to Ryan Decker for many of the links in this post.)


  1. Hi Noah,

    Here's some other research from the Govt. economist team that Haltiwanger works with at Census and other researchers at BLS:

    Changing employer/employee characteristics don't blame the decline:

    Declining entrepreneurship and growth rates of new companies:

    I'm still amazed that even though labor economists have been pointing this out for years in papers and at conferences, it's only after a Brookings working paper that the press seemed to catch on.

    My own research work/hope is that we can finally get people to stop using the myth of a "more mobile and transient workforce" as an accepted excuse for companies that switch to Defined Contribution plans. If anything, the labor force is getting less mobile and therefore companies are finding that they don't need to offer the incentives of a DB plan to get them to stay.

    1. AND THE workforce gets bigger year after year

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  2. That should be "don't explain the decline" not "don't blame the decline"

    1. decline9:33 PM

      yes you can't ....explain
      that is problematic

  3. Two observations/questions.
    I've been reading Susan Crawford's "Captive Audience" about consolidation in the broadband industry. Along with that, Ron Chernow's "House of Morgan", a history of the Morgan banks and firms. From these I get the sense that we've returned to an age of consolidation where the largest firms and industries are finding increasing ways to integrate both horizontally but also vertically (it seems the Age of Outsourcing may be beginning to turn on itself).
    Is there evidence that this is happening? If there is such evidence does it begin to explain what you discuss in the post?
    Second, I’ve noticed what seems to be a greater trend to a sort of an underground economy. There’s the E-Bay phenomenon where lots of little and some big sellers seem to be operating outside of parts of the traditional economy. I’ve also noticed, anecdotally, that a good many people are running service businesses outside the traditional economy. I know a good many tradesmen, plumbers, carpenters, etc. and many of them seem to be working more than ever for cash. Even those that do business “on the books” seem to be doing so in much less formal ways.
    Is there any evidence of a growing “dark” economy, a sort of place where people who haven’t been able to find traditional jobs with traditional firms are working sort of on the edges? There do seem to be narratives that say we’ve become a temp economy and an economy of “consultants” where firms use workers in much less connected ways.
    It seems that one of the dreams of large American business has been to escape the connection of retirement and healthcare to one’s job. In much of the rest of the industrialized and modern world that connection was broken by the creation of national healthcare and pension systems. We’ve fought that here and instead business seems to be more intent on finding ways to evade retirement and healthcare totally – not shifting the responsibility to national systems but essentially dumping the responsibility entirely on the individual. That may have an ideological attractiveness but from a practical perspective it leaves a tremendous amount of the workforce uncovered, especially in an age of globalization where capital can simply seek labor at some cheaper foreign point.

  4. It America in decline? hardly, especially compared to the rest of the world. Just recently snapchat, airbnb, dropbox, and pinterest - all companies that were created before 2008- were valued at $3-10 billion a piece Apple just bought Dr. Dre headphones for $4 billion. Stocks are at historic highs and inflation still rock bottom.

    We're doing better than ever. Or as Louis Ck says, everything is wonderful and no one is happy.

  5. Are there data that are broken down by sector? (e.g., high tech versus retail) Seems that would be informative.

    1. One of those links up there shows that the shift is a lot more pronounced in retail.

    2. Would seem to support your hypothesis, I think.

  6. bjdubbs11:38 AM

    Sailer is an academic? Which school would that be?

  7. Clive Newman10:30 AM

    Based on the SEC reports of and news stories about firms like Google, Oracle, IBM, etc. it sounds like a lot of entrepreneurship happens WITHIN big firms these days.

    I.e. Google has fellows, university professors, and full-time employees that are working on a gamut of fascinating, high-risk projects within the financial and legal umbrella of Google.

    A lot of these projects are not at all related to Google's core business to they are effectively similar to what an entrepreneur would do on his own, except here Google provides the money, facilities, etc. instead of a Venture Capitalist.

    Likewise at IBM, where all sorts of projects are brewing essentially as small business enterprises within the IBM infrastructure.

    How do we account for that?

  8. What's a 'firm' here? Sole proprietorship? Partnership? DBA?
    Restaurants used to account for a large proportion of business entries and exits ( ~50%, IIRC). I would expect franchises and chain restaurants to have a much lower failure rate than independents, because they can afford market analysis and siting studies. Lower churn could be a consequence of greater efficiency...

  9. Nathanael7:10 PM

    Firm churn:

    More of the markets are dominated by monopolies and cartels.

    This is because more of the important businesses in the US are *natural monopolies* now -- things with giant economies of scale and massive network effects. Like Facebook and Google and Amazon and TimeWarnerComcast. The profit is in the size of the network, and that means monopoly, and that means no firm churn.

    That's a technological explanation, I guess. But it's a *specific* technological explanation, rather than handwaving.

    Job churn:
    People have been tied to their job by health insurance. And then there's the "no poaching" cartel agreement among Apple, Google, and a hundred other companies, documented recently. I don't think it's mysterious why people don't change jobs; they're trapped. And yes, this IS BAD.