How too little dynamism is hurting US living standards

Public transportation in San Francisco, California. Some people entering the bus to start their commute on a sunny afternoon on the West Coast. Twenty20.com

Better late than never in highlighting this important paper, “Declining Dynamism, Allocative Efficiency, and the Productivity Slowdown” by Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda:

The evidence presented here advances the literature in three ways. First, decompositions of aggregate labor productivity growth suggest that impaired growth in allocative efficiency can account for the bulk of the productivity slowdown from the late 1990s to the mid 2000s. Current debates about the productivity slowdown focus on whether it reflects slowing technological improvement or increasingly imperfect measurement, but allocative efficiency is crucial for transmitting advances in technology and management practices into aggregate productivity growth. Decelerating allocative efficiency can constrain productivity growth even in the midst of rapid technological progress; alternatively, changes in technology may be influencing the pace of reallocation and possibly allocative efficiency measures. We also observe wide variation in within-firm productivity growth and growth slowdowns by firm size. This evidence should inspire a reevaluation of the productivity slowdown debate.

Second, there are complex interactions between within-firm productivity growth and measures of allocative efficiency. The covariance between within-firm productivity growth and initial size has weakened, and the 90th percentile of the within-firm productivity growth distribution has fallen. The decline in the latter is more substantial for the largest firms, so in this respect it is difficult to draw clear distinctions between allocative efficiency and technological stagnation mechanisms.

Third, the evidence is consistent with the notion that post-2000 declining business dynamism has not been benign for American living standards but, instead, is closely related to slowing productivity growth. These results complement Decker et al. (2017), which finds that declining reallocation reflects a decline in the responsiveness of individual businesses to their productivity. While the discovery of strong causal factors behind these patterns has thus far proven elusive in this literature, the accumulating evidence has narrowed the possibilities considerably while emphasizing the importance of the topic.

And Nick Bunker at Equitablog summarizes:

What the four economists find that is that productivity growth among existing firms isn’t the primary driver of the drop-off in overall productivity growth that we’ve seen since the turn of the century. The biggest decline among the three factors is in the second one, indicating a decline in reallocation between existing firms. In other words, employment and economic output are not flowing to the more productive firms. The third bucket also contributed to the post-2000 decline in productivity growth, as the net entry of new businesses also was on the decline, indicative of the potential impact of the declining start-up rate in the United States. The authors do note that the first factor—within-firm productivity—may also be contributing to some extent as productivity growth among high-productivity firms has declined.

Wanted: More dynamism, more competition, more churn. As the paper notes at the outset:

Evidence of declining entrepreneurship and labor market fluidity has captured wide interest among researchers and policymakers. Startup rates and other measures of young firm activity have declined since the 1980s, with accelerated slowdowns in high-growth young firm activity since 2000. Gross job and worker flows have declined over the same period including marked drops since the early 2000s. These patterns are particularly notable in the High Tech sector, which saw rising dynamism during the 1990s before declining sharply after 2000 (Decker et al. (2016)).