Where Are the Start-Ups? Loss of Dynamism Is Impeding Growth

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One might blame this on the recession that crippled the world almost a decade ago, in the wake of the global financial crisis set off by the implosion of home values in the United States. But the weariness extends beyond the latest turns of the economic cycle.

The stagnation poses a threat to the market economy’s main claim to legitimacy: that it delivers prosperity. The income of the typical American household is roughly the same as it was in the 1980s. It is unlikely to be a coincidence.

In a study published on Tuesday by the Hamilton Project at the Brookings Institution, Jay Shambaugh, Ryan Nunn and Patrick Liu explore what economists have figured out about the American economy’s inertia and the fallout for wages and living standards.

Start-Ups on the Decline

The rate of business formation is declining in the United States and in many other wealthy nations.

Start-up and shutdown rates among

all United States companies

Start-ups as a share of all companies

In selected O.E.C.D. countries

Start-ups as a share of all companies

Start-up and shutdown rates among

all United States companies

In selected O.E.C.D. countries

The evidence paints a distinct picture of decline: Fewer start-ups mean fewer new ideas and fewer young, productive businesses to replace older, less productive ones. Researchers have found that the decline in companies entering the market since 1980 has trimmed productivity growth by about 3.1 percent.

The dearth of new businesses is also cutting off one of the main paths to workers’ advancement: the outside job offer. Changing jobs allows workers to shift to positions in which they are more productive, and better paid. But labor market fluidity — job switching, creation and destruction — has been declining since the 1980s.

Clear though the pattern may be, the researchers acknowledge that we haven’t yet figured out what is holding the economy’s dynamism back. “This is one of those big, economywide trends,” Mr. Shambaugh told me. “There is room for a lot of stories.”

Can the corporate landscape become more dynamic again? “None of the potential policy explanations have been conclusively shown to account for the bulk of the decline in dynamism,” Mr. Shambaugh and his colleagues note. The critical question that remains is whether there is a set of policies that might restore the economy’s vitality.

This isn’t just about demographic and social change. Sure, we are aging. Older workers will be less likely to move to a new job across state lines. Families with two earners will have a harder time relocating when one gets a new job offer. Stratospheric rents will make it tough to migrate to some of the most vibrant labor markets, like New York or San Francisco.

Policy has certainly played a role: Labor market regulations can gum up the sorting of workers into the best possible jobs, where they will be at their most productive and most highly paid. Specifically, state occupational licensing rules fence off some of the most desirable, well-paid jobs.

But this alone cannot explain away stagnation. Explaining stagnation requires explaining not only why there are so few well-paying jobs but also why there are so few emergent companies ready to employ productive workers. Well into the information age, in a business ecosystem with low barriers to entry, where venture capital stands ready to throw itself at the next good idea, the economy has somehow forgotten how to create companies.

My best guess is that this is all about the decline of competition. Mr. Shambaugh and his co-authors note how noncompete agreements and other devices used by businesses to stop their employees from seeking jobs elsewhere are preventing many workers from taking the better job that pays more money. I would argue that the failure is bigger: By allowing an ecosystem of gargantuan companies to develop, all but dominating the markets they served, the American economy shut out disruption. And thus it shut out change.

This is not the only possible diagnosis, I understand. Many economists will reject my proposition that the nation’s economy has been given to oligopolies; that antitrust law has proved no match for the ferocious concentration of market power in the hands of a few businesses that have been allowed to impose their will on the economy as a whole.

It fits, however. An economy controlled by big, entrenched companies will have little place for the kind of disruption that could push productivity onto a higher plane. That description looks very much like the economy that many American workers are coping with today.

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