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

Author

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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    3. Giovanni Dosi & Marcelo Pereira & Andrea Roventini & Maria Enrica Virgillito, 2018. "Causes et consequences of hysteresis : aggregate demand, productivity and employment," Sciences Po publications info:hdl:2441/hiaqa97n684, Sciences Po.
    4. Marcin Bielecki, 2022. "Innovation and Endogenous Growth over the Business Cycle with Frictional Labor Markets," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 14(3), pages 263-302, September.
    5. 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 and the Associazione ICC, vol. 27(6), pages 1015-1044.
    6. 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.
    7. Ia Vardishvili, 2020. "Entry Decision, the Option to Delay Entry, and Business Cycles," Auburn Economics Working Paper Series auwp2020-07, Department of Economics, Auburn University.
    8. Marcin Bielecki, 2022. "Long Shadows of Financial Shocks: An Endogenous Growth Perspective," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 1-23.
    9. Cumming, Fergus, 2022. "Mortgage cash-flows and employment," European Economic Review, Elsevier, vol. 144(C).
    10. Marcin Bielecki, 2017. "Business cycles, innovation and growth: welfare analysis," Working Papers 2017-19, Faculty of Economic Sciences, University of Warsaw.

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