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A Missing Generation of Firms? Aggregate Effects of the Decline in New Business Formation

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Listed:
  • Todd Messer

    (UC Berkeley)

  • Michael Siemer

    (Federal Reserve System Board of Governors)

  • Francois Gourio

    (Federal Reserve Bank of Chicago)

Abstract

Unlike most previous recessions, the 2007-2009 contraction was associated with a very large and persistent decline in new business formation. We study the aggregate implications of this phenomenon. While reduced entry rate plays only a minor role in accounting for the initial contraction, the effects are very persistent under plausible models of firm dynamics. This suggests that lower entry may account for part of the slow U.S. recovery. We start with a simple calculation that illustrates that lower en- try since 2006 “accounts†for a significant reduction of employment. We next present state-level and MSA-level evidence within the U.S. in order to evaluate this hypothesis. We consider several alternative factors that may affect the speed of the recovery such as the debt to GDP ratio, the decline in house prices, or the decline in small business lending. Among the considered hypothesis the decline in entry stands out as the dominant factor in predicting the speed of the recovery.

Suggested Citation

  • Todd Messer & Michael Siemer & Francois Gourio, 2016. "A Missing Generation of Firms? Aggregate Effects of the Decline in New Business Formation," 2016 Meeting Papers 752, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:752
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    References listed on IDEAS

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    1. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    2. Benjamin Wild Pugsley & Ay’egul ahin, 2019. "Grown-up Business Cycles," Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 1102-1147.
    3. Gian Luca Clementi & Dino Palazzo, 2010. "Entry, Exit, Firm Dynamics, and Aggregate Fluctuations," Working Paper series 27_10, Rimini Centre for Economic Analysis.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    6. Dave Reifschneider & William Wascher & David Wilcox, 2015. "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 71-109, May.
    7. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98, National Bureau of Economic Research, Inc.
    8. Sînâ T. Ateş & Felipe E. Saffie, 2014. "Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection," PIER Working Paper Archive 14-043, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    9. Michael Siemer, 2014. "Firm Entry and Employment Dynamics in the Great Recession," Finance and Economics Discussion Series 2014-56, Board of Governors of the Federal Reserve System (US), revised 30 Jul 2014.
    10. Francisco Buera & Roberto Fattal-Jaef & Yongseok Shin, 2015. "Anatomy of a Credit Crunch: From Capital to Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 101-117, January.
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    Cited by:

    1. Marcin Bielecki, 2017. "Business cycles, innovation and growth: welfare analysis," Working Papers 2017-19, Faculty of Economic Sciences, University of Warsaw.
    2. Marcin Bielecki, 2017. "Long shadows of financial shocks: an endogenous growth perspective," Working Papers 2017-22, Faculty of Economic Sciences, University of Warsaw.
    3. G Dosi & M C Pereira & A Roventini & M E Virgillito, 2018. "Causes and consequences of hysteresis: aggregate demand, productivity, and employment," Industrial and Corporate Change, Oxford University Press, vol. 27(6), pages 1015-1044.
    4. Giovanni Dosi & Marcelo C. Pereira & Andrea Roventini & Maria Enrica Virgillito, 2018. "Causes et consequences of hysteresis : aggregate demand, productivity and employment," Sciences Po publications info:hdl:2441/4h9cnu4n2k8, Sciences Po.
    5. Marcin Bielecki, 2017. "Innovation and endogenous growth over business cycle with frictional labor markets," Working Papers 2017-26, Faculty of Economic Sciences, University of Warsaw.

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