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Older and Slower: The Startup Deficit's Lasting Effects on Aggregate Productivity Growth

Author

Listed:
  • Robert Dent

    (University of Virginia)

  • David Berger

    (Northwestern University)

  • Benjamin Pugsley

    (Federal Reserve Bank of NY)

  • Titan Alon

Abstract

The more than thirty-year decline in the rate of new employer business creation, and with it the significant shift in the firm age distribution of U.S. employers have both slowed U.S. labor productivity growth. This gradually accumulating drag on productivity growth was obscured by the surge in TFP in the late 1990s and early 2000s (see Fernald 2014). Earlier work by Baily et al. (1992) and Foster et al. (2006) among others has shown the crucial role of reallocation among establishments, primarily from entry and exit, in explaining aggregate productivity growth within the manufacturing and retail trade sectors. In this paper, we use administrative Census data with near universal coverage of the non farm private sector to assess the effects on aggregate productivity from the direct effects of the decline in the business entry rate and its indirect effect on the age distribution. We follow the methodology of Haltiwanger et al. (2016) and merge the Census Longitudinal Business Database (LBD) with data on annual sales from IRS records in the Census Business Register to construct a revenue-enhanced LBD with annual firm level measures of real sales per worker. Using these measures as rough proxies for labor productivity within narrow NAICS industries, we quantify how the entire distribution of labor productivity evolves by firm age as well as other firm characteristics by extending the dynamic Olley-Pakes decomposition in Melitz and Polanec (2015). Looking across the entire private-sector economy, we have three main findings. First, we document that the age-profile of labor productivity growth of firms between the ages of 1 and 19 is downward sloping and convex. Productivity growth is highest among young firms and declines quickly with firm age. Since startups have higher productivity growth rates, a decline in the startup rate lowers aggregate productivity growth. Second, we document that this age profile of firms aged 1-19 and the pattern of selection is stable across our sample. This means that the slow down in aggregate productivity growth has not come from changes in the age profile of productivity growth for these age cohorts. Third, the contribution of mature firms (age 20+) to aggregate productivity growth has declined significantly since the mid-2000 and the source of this decline has been a slowdown in allocative efficiency (the most productivity mature firms have not gained market share relative to less productive firms). We use these cross sectional results to calibrate an equilibrium growth model with heterogeneous firms and to perform simple counterfactuals. The model allows us to estimate the aggregate consequences of the declines in entry for aggregate productivity in the time series. Using the model we quantify the total effect of the decades long startup deficit on aggregate productivity growth. Simple counterfactuals suggest that the decline in the startup rate can explain a significant fraction, though not all, of the aggregate productivity growth slowdown.

Suggested Citation

  • Robert Dent & David Berger & Benjamin Pugsley & Titan Alon, 2017. "Older and Slower: The Startup Deficit's Lasting Effects on Aggregate Productivity Growth," 2017 Meeting Papers 1224, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1224
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    References listed on IDEAS

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    3. Michael D. Bordo & John V. Duca, 2018. "The Impact of the Dodd-Frank Act on Small Business," Working Papers 1806, Federal Reserve Bank of Dallas.
    4. Fatih Karahan & Benjamin Pugsley & Ayşegül Şahin, 2019. "Demographic Origins of the Startup Deficit," NBER Working Papers 25874, National Bureau of Economic Research, Inc.
    5. Alexandra Tsvetkova & Rudiger Ahrend & Joaquim Oliveira Martins & Alexander C. Lembcke & Polina Knutsson & Dylan Jong & Nikolaos Terzidis, 2020. "The spatial dimension of productivity: Connecting the dots across industries, firms and places," OECD Regional Development Working Papers 2020/01, OECD Publishing.
    6. Sónia Félix & Chiara Maggi, 2019. "What is the Impact of Increased Business Competition?," Working Papers w201904, Banco de Portugal, Economics and Research Department.
    7. Herkenhoff, Kyle F. & Ohanian, Lee E. & Prescott, Edward C., 2018. "Tarnishing the golden and empire states: Land-use restrictions and the U.S. economic slowdown," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 89-109.
    8. Röhe, Oke & Stähler, Nikolai, 2020. "Demographics and the decline in firm entry: Lessons from a life-cycle model," Discussion Papers 15/2020, Deutsche Bundesbank.
    9. Leland Crane & Ryan Decker, 2019. "Business Dynamics in the National Establishment Time Series (NETS)/Leland Crane, Ryan Decker," Finance and Economics Discussion Series 2019-034, Board of Governors of the Federal Reserve System (U.S.).
    10. Artz, Georgeanne M. & Eathington, Liesl & Francois, Jasmine & Masinde, Melvin & Orazem, Peter F., 2020. "Churning in Rural and Urban Retail Markets," ISU General Staff Papers 202001010800001782, Iowa State University, Department of Economics.
    11. E. Mark Curtis & Ryan Decker, 2018. "Entrepreneurship and State Taxation," Finance and Economics Discussion Series 2018-003, Board of Governors of the Federal Reserve System (U.S.).
    12. Ryan A. Decker & John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2017. "Declining Dynamism, Allocative Efficiency, and the Productivity Slowdown," American Economic Review, American Economic Association, vol. 107(5), pages 322-326, May.
    13. Ryan Decker & John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2018. "Changing Business Dynamism and Productivity : Shocks vs. Responsiveness," Finance and Economics Discussion Series 2018-007, Board of Governors of the Federal Reserve System (U.S.).
    14. Francesco Manaresi & Carlo Menon & Pietro Santoleri, 2020. "Supporting innovative entrepreneurship: an evaluation of the Italian "Start-up Act"," Mo.Fi.R. Working Papers 163, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    15. Giuseppe Albanese & Raffaello Bronzini & Luciano Lavecchia & Giovanni Soggia, 2019. "Regional policies for Italian innovative start-ups," Questioni di Economia e Finanza (Occasional Papers) 511, Bank of Italy, Economic Research and International Relations Area.
    16. Joonkyu Choi & Nathan Goldschlag & John Haltiwanger & J. Daniel Kim, 2019. "Founding Teams and Startup Performance," Working Papers 19-32, Center for Economic Studies, U.S. Census Bureau.
    17. Joonkyu Choi, 2018. "Entrepreneurial Risk-Taking, Young Firm Dynamics, and Aggregate Implications," 2018 Meeting Papers 1018, Society for Economic Dynamics.
    18. Georgeanne M. Artz & Younjun Kim & Peter F. Orazem & Peter J. Han, 2021. "Which Small Towns Attract Start‐Ups and Why? Twenty Years of Evidence from Iowa," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(2), pages 702-720, March.
    19. Tessa Conroy & Steven Deller & Philip Watson, 2021. "Regional income inequality: a link to women-owned businesses," Small Business Economics, Springer, vol. 56(1), pages 189-207, January.
    20. Lee,Yoonsoo, 2020. "Long-Term Shifts in Korean Manufacturing and Plant-Level Productivity Dynamics," Policy Research Working Paper Series 9279, The World Bank.
    21. Evguenia Bessonova & Anna Tsvetkova, 2019. "Productivity convergence trends within Russian industries: firm-level evidence," Bank of Russia Working Paper Series wps51, Bank of Russia.
    22. Kehrig, Matthias, 2018. "Comment on “Computerizing industries and routinizing jobs: Explaining trends in aggregate productivity” by Sangmin Aum, Sang Yoon (Tim) Lee and Yongseok Shin," Journal of Monetary Economics, Elsevier, vol. 97(C), pages 22-28.
    23. Alexander Murray, 2017. "What Explains the Post-2004 U.S.Productivity Slowdown?," CSLS Research Reports 2017-05, Centre for the Study of Living Standards.
    24. Alexander Murray, 2018. "What Explains the Post-2004 U.S. Productivity Slowdown?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 34, pages 81-109, Spring.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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