Summary: Economists are studying the mysterious multi-decade slowing of the US economy. One bright spot was rapid job growth in a few rapidly-growing young firms. A new study shows that since 2000 both the number of start-up firms and the number of those with very rapid growth has been declining. It’s another step on the path to secular stagnation, an economic illness which could reshape America in a bad way. When we take this problem seriously our political leaders will do so. This election season shows some signs that has begun.
The Number of High-Growth, Job-Creating Young Firms is Declining
By Jay Fitzgerald from the NBER Digest, February 2016
Red emphasis added.
The number of start-up firms in the United States has been declining in recent decades. Prior to 2000, the employment effects of this decline were partly offset by the presence of a small number of high-growth young companies. That pattern seems to have changed.
In “Where Has All the Skewness Gone? The Decline in High-Growth (Young) Firms in the U.S.“, Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda show that the general decline in new firms has been accompanied, since around 2000, by a corresponding decline in the number of high-growth start-ups.
New firms accounted for about 13% of all companies in the late 1980s, but only about 8% two decades later. In the 1980s and 1990s, however, a small number of young, innovative, and dynamic companies grew at very high rates. This “skewness” in the rate of job creation among young firms increased the contribution of young firms to overall job creation.
The researchers measured skewness patterns and other business trends within industries, from manufacturers to mom-and-pop retailers to technology start-up firms. Relying largely on statistics from the U.S. Census Bureau’s Longitudinal Business Database (LBD) for the years 1976 through 2011, they analyzed information on firm growth rates by detailed industry, firm age, and firm size.
The researchers found positive job growth skewness within some industries in the early years that they analyzed, particularly in the services and high-tech sectors of the 1980s and 1990s. As late as 1999, a firm at the 90th percentile of the employment growth rate distribution grew 31%Â faster than the median firm. In addition, the jobs-growth differential between firms at the 90th and 50th percentiles was 16% larger than that between firms at the 50th and 10th percentiles, again suggesting positive skewness in employment growth rates. But the employment-growth distribution changed substantially in the post-2000 period. By 2007, the 90-50 differential was only 4% larger than the 50-10, and it continued to decline throughout the period analyzed.
These trends suggest that startups contributed less to U.S. job creation in the post-2000 period than they did in earlier decades, but the researchers cannot yet explain the dynamic. “While we have attempted to describe in detail several aspects of declining skewness in the U.S. using industry, size, and age comparisons,” they write, “we have not identified the underlying causes of these trends.” Among potential explanations are credit constraints, rising investments in equipment that reduce the need for new employees, outsourcing of work to developing countries, and larger companies acquiring younger firms at an earlier stage of development.
The researchers note that the Great Recession had a negative effect on employment growth, but they point out that the decline in the number of high-growth young firms started well before that downturn.
“Historically, the U.S. has exhibited a high pace of entrepreneurship with a small share of fast growing young firms disproportionately accounting for job creation and productivity growth,” they conclude. “The decline in startups and the accompanying decline in high growth young firms either suggests adverse consequences for U.S. economic growth or a change in the way that such growth will be achieved.”
About the study
Abstract of Where Has All The Skewness Gone?
The Decline In High-Growth (Young) Firms In The U.S.
By Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda.
Published by the NBER, January 2016
The pace of business dynamism and entrepreneurship in the U.S. has declined over recent decades. We show that the character of that decline changed around 2000. Since 2000 the decline in dynamism and entrepreneurship has been accompanied by a decline in high-growth young firms.
Prior research has shown that the sustained contribution of business startups to job creation stems from a relatively small fraction of high-growth young firms. The presence of these high-growth young firms contributes to a highly (positively) skewed firm growth rate distribution. In 1999, a firm at the 90th percentile of the employment growth rate distribution grew about 31% faster than the median firm. Moreover, the 90-50 differential was 16% larger than the 50-10 differential reflecting the positive skewness of the employment growth rate distribution.
We show that the shape of the firm employment growth distribution changes substantially in the post-2000 period. By 2007, the 90-50 differential was only 4% larger than the 50-10, and it continued to exhibit a trend decline through 2011. The overall decline reflects a sharp drop in the 90th percentile of the growth rate distribution accounted for by the declining share of young firms and the declining propensity for young firms to be high-growth firms.
About the National Bureau of Economic Research (NBER)
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The Bureau’s associates concentrate on four types of empirical research: developing new statistical measurements, estimating quantitative models of economic behavior, assessing the economic effects of public policies, and projecting the effects of alternative policy proposals. The NBER is supported by research grants from government agencies and private foundations, by investment income, and by contributions from individuals and corporations.
For More Information
People often consider venture capital as a cure for this problem. It’s not. It might be contributing to it. For a good debunking of VCs see “Six Myths About Venture Capitalists” by Diane Mulcahy in the May 2013 Issue of Harvard Business Review.
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In 2000 the tech bubble burst. It had been the fuel for economic growth Clinton takes credit for but he had nothing to do with it. It wasn’t the bubble housing was but it did affect our economy, jobs, and small startups. The companies that did start due to the internet, the need for computers, smartphones, has exploded in america. As our country’s needs have changed the types of companies that experienced growth has changed.
Our manufacturing base has moved overseas where labor is cheaper and has kept the prices down on basic goods. Tech and new machinery has made farming and food growth a corporate industry and not a private farm business. There are many reasons for changes in our private industries a and none involve our secular govt; in fact our growth has been because of our secular govt not in spite of it.
Dennis,
(1) “Our manufacturing base has moved overseas where labor is cheaper and has kept the prices down on basic goods.”
Can you provide some supporting evidence? Every metric of US manufacturing I’ve seen shows growth. Exports have been a growth story for decades. Mfg uses fewer people for the same reason farming output has grown while the number of farmers has collapsed: automation.
(2) “because of our secular govt not in spite of it.”
I suspect you refer to secular stagnation. It refers to a period of “negligible or no economic growth in a market-based economy“. The term is associated with no specific set of causes; it’s occurred in many times and places from different causes. Here’s an intro to the concept by economist Larry Summers from the February Foreign Affairs.