Declining Business Dynamism: What We Know and the Way Forward
Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, Javier Miranda
American Economic Review: Papers and Proceedings,
No. 5,
2016
Abstract
A growing body of evidence indicates that the U.S. economy has become less dynamic in recent years. This trend is evident in declining rates of gross job and worker flows as well as declining rates of entrepreneurship and young firm activity, and the trend is pervasive across industries, regions, and firm size classes. We describe the evidence on these changes in the U.S. economy by reviewing existing research. We then describe new empirical facts about the relationship between establishment-level productivity and employment growth, framing our results in terms of canonical models of firm dynamics and suggesting empirically testable potential explanations.
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The Role of Entrepreneurship in US Job Creation and Economic Dynamism
Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, Javier Miranda
Journal of Economic Perspectives,
No. 3,
2014
Abstract
An optimal pace of business dynamics—encompassing the processes of entry, exit, expansion, and contraction—would balance the benefits of productivity and economic growth against the costs to firms and workers associated with reallocation of productive resources. It is difficult to prescribe what the optimal pace should be, but evidence accumulating from multiple datasets and methodologies suggests that the rate of business startups and the pace of employment dynamism in the US economy has fallen over recent decades and that this downward trend accelerated after 2000. A critical factor in accounting for the decline in business dynamics is a lower rate of business startups and the related decreasing role of dynamic young businesses in the economy. For example, the share of US employment accounted for by young firms has declined by almost 30 percent over the last 30 years. These trends suggest that incentives for entrepreneurs to start new firms in the United States have diminished over time. We do not identify all the factors underlying these trends in this paper but offer some clues based on the empirical patterns for specific sectors and geographic regions.
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Worker Beliefs about Outside Options
Simon Jäger, Christopher Roth, Nina Roussille, Benjamin Schoefer
Quarterly Journal of Economics,
2099
Abstract
Standard labor market models assume that workers hold accurate beliefs about the external wage distribution, and hence their outside options with other employers. We test this assumption by comparing German workers’ beliefs about outside options with objective benchmarks. First, we find that workers wrongly anchor their beliefs about outside options on their current wage: workers that would experience a 10% wage change if switching to their outside option only expect a 1% change. Second, workers in low-paying firms underestimate wages elsewhere. Third, in response to information about the wages of similar workers, respondents correct their beliefs about their outside options and change their job search and wage negotiation intentions. Finally, we analyze the consequences of anchoring in a simple equilibrium model. In the model, anchored beliefs keep overly pessimistic workers stuck in low-wage jobs, which gives rise to monopsony power and labor market segmentation.
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