Business Dynamics and Macroeconomics
By Arnold Kling
Tim Kane finds that the tendency for a firm to add or subtract jobs declines with the age of the firm. Much of the job creation on average comes from startup firms. In fact, Kane puts it this way:
without startups, there would be no net job growth in the U.S. economy. This fact is true on average, but also is true for all but seven years for which the United States has data going back to 1977.
He is using a new data set on business dynamics, one which has also been exploited by John Haltiwanger, Ron S. Jarmin, and Javier Miranda, who write,
we find a rich “up or out” dynamic of young firms in the U.S. That is, conditional on survival, young firms grow more rapidly than their more mature counterparts. However, young firms have a much higher likelihood of exit so that the job destruction from exit is disproportionately high among young firms. More generally, young firms exhibit much more churning of jobs as evidenced by high rates of gross job creation and destruction.
I am curious as to how a recession, particularly the current one, differs from a normal period. Consider the following possibilities.
a) fewer firms are started
b) more young firms (age less than three years) fail
c) more old firms (age three years or more) fail
d) old firms discard more workers
My money is on (c) and (d), creating what I call the “flood of refugees” into the labor market that is too large to be absorbed by the relatively constant rate of new firm formation.