John Haltiwanger thinks he may have discovered one reason why the private sector is not creating more jobs this far into the so-called recovery, and if he’s right, it is cause for concern:
The U.S. economy has become less dynamic and entrepreneurial.
Haltiwanger is a distinguished professor at the University of Maryland and one of the best economists around, particularly when it comes to the subject of job creation. A former chief economist at the Census Bureau, he’s constantly mining, aggregating and analyzing the data at the level of the individual firm. He’s also a straight shooter, without a trace of ideological bias, as far as I can tell.
For years now, Haltiwanger has been trying to set things straight on the question of which firms are creating jobs, most recently in a paper with the catchy title, “Job Creation and Firm Dynamics in the U.S.”
Haltiwanger starts out by noting that in an economy with about 110 million private sector jobs, firms create and destroy 15 to 17 million jobs in a typical year. This churning goes on in all industries and all sizes of firms — it even goes on within the same firm — and what drives it is the the constant shifting of work from the least productive firms and factories and stores to the more productive.
For many decades, the U.S. economy has been more effective at this process of “creative destruction” than almost any other country in the world. And what Haltiwanger and his collaborators have found over the years is that young firms — business startups and a small number of new firms that grow very quickly — have played an outsize role in that process. In job creation, it turns out, it is not size that matters but the age of the firm. Small businesses don’t create all the new jobs — young ones do.
In recent years, however, this entrepreneurial dynamism began to slow. Job creation and job destruction began their decline as far back as the 1990s, and continued right up to the Great Recession, when job destruction fell to its lowest level in 30 years, and job creation even more. The average business became older and larger.
Moreover, since the trough of the recession in 2009, Haltiwanger finds that the rate of overall job destruction has returned to the more normal levels before the recession, even as the rate of job creation remains near its historic low. The culprit, Haltiwanger suspects, has been the measurable slowdown in business startups and the unusually slow job growth among those all-important young and fast-growing firms.
Perhaps you’ve noticed that we are halfway through this column about job creation and I have yet to mention the Federal Reserve’s monetary policy or fiscal stimulus or the deficit or even taxes. The reason is pretty simple: It’s hard to draw a convincing connection between any of them and a decline in entrepreneurial dynamism that began more than a decade ago.
That doesn’t mean some won’t try. Conservatives will no doubt leap to the conclusion that concerns about future deficits and tax increases and expanded regulation of business weigh so heavily on entrepreneurs that they are reluctant to launch new firms or expand ones they have recently opened. Die-hard Keynesians, by contrast, will argue that if more fiscal and monetary stimulus had been used to generate higher levels of economic activity, there would be more economic activity and entrepreneurs would have regained the confidence to invest and hire.
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