For the Myth of the Macroeconomy File
By Arnold Kling
In any given year, about 17 percent of all jobs are from expanding or entering businesses. Moreover, about 15 percent of all jobs present the prior year have disappeared through contracting or exiting businesses. The chart also indicates the significant role played by firm and establishment entry and exit.
18 percent of gross job creation is accounted for by new firms, 19 percent of gross job creation is accounted for by the opening of new establishments of existing firms and the remainder (63 percent) by the expansion of existing establishments. In terms of gross job destruction, 17 percent is accounted for by firm exit, 14 percent by the closing of establishments of existing firms and the remainder (68 percent) by the contraction of existing establishments.
In the U.S., research shows that exiting businesses are less productive than continuing ones. Furthermore, the data show that, conditional on survival, young establishments have higher productivity levels and higher productivity gains than more mature establishments. In effect, the churning process replaces lower productivity businesses with new, more productive ones, thereby increasing productivity in the economy as a whole.
a large fraction of U.S. productivity gains reflect the displacement of low productivity establishments by new establishments with higher productivity. The volatile role that new firms play in the churning of the economy, it seems, is vital to our productivity growth
in an ideal setting the most productive firms are the largest firms. In a distorted economy with poor institutions, the largest firms may not be the most productive but rather the best connected or perhaps the best at navigating the distortions within a country. In a related fashion, in a distorted economy, entrepreneurs with innovative ideas for new products, processes and ways of doing business may face barriers to entry and growth. Alternatively, unproductive incumbent firms may be able to maintain their size and survive due to lack of competition and distortions.
Let me break in here. One way to think about the dynamics of the U.S. economy over the past thirty years is from the perspective of the New Commanding Heights. We have seen a decline in the relative importance of production and trade. We have seen an increase in the importance of health care and education. This has meant a shift from a relatively less distorted part of the economy to a more distorted part of the economy, where ” entrepreneurs with innovative ideas for new products, processes and ways of doing business may face barriers to entry and growth. ”
Average annual job creation from business startups has declined from 3.5 percent of employment in the 1980s, to 3 percent in the 1990s to 2.6 percent in the post-2000 period. This represents more than a 25 percent decline in the pace of job creation from business startups.
In retail trade, there has been a sustained and dramatic shift towards large, national chains and away from small single unit establishment (often referred to as “mom and pop”) retail firms. Much of the firm volatility in retail trade has historically been driven by the volatility of “mom and pop” stores.
from the early 1980s to 2001 the share of employment in businesses more than 6 years old increased from about 75 percent to 83 percent. This shift alone accounts for about 27 percent of the decline in volatility. Does this imply the U.S. economy has become less flexible? Much more research is needed but these patterns raise concerns to the extent that younger businesses are more flexible and engage in more experimentation
between March 2008 and March 2009, expanding and new businesses created jobs at a 12.4 percentage point rate. While this is still many jobs being created in even very difficult times, it represents a substantial decline relative to the 16.5 percentage point rate in 2006 and the lowest rate in at least 30 years.
2. From Brian Arthur:
Today, you walk into an airport and look for a machine. You put in a frequent-flier card or credit card, and it takes just three or four seconds to get back a boarding pass, receipt, and luggage tag. What interests me is what happens in those three or four seconds. The moment the card goes in, you are starting a huge conversation conducted entirely among machines.
Twenty years ago, if you were shipping freight through Rotterdam into the center of Europe, people with clipboards would be registering arrival, checking manifests, filling out paperwork, and telephoning forward destinations to let other people know. Now such shipments go through an RFID2 portal where they are scanned, digitally captured, and automatically dispatched. The RFID portal is in conversation digitally with the originating shipper, other depots, other suppliers, and destinations along the route, all keeping track, keeping control, and reconfiguring routing if necessary to optimize things along the way. What used to be done by humans is now executed as a series of conversations among remotely located servers.
Physical jobs are disappearing into the second economy, and I believe this effect is dwarfing the much more publicized effect of jobs disappearing to places like India and China.
the main challenge of the economy is shifting from producing prosperity to distributing prosperity. The second economy will produce wealth no matter what we do; distributing that wealth has become the main problem. For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinking–fewer of us in the future may have white-collar business process jobs–and we face a problem.
The standard view in economics is that wants are unlimited, so that in the long run as old jobs are destroyed new jobs are created. But will reality conform to this theory? Brian Arthur is suggesting that it might not. I have an article coming out in about a month at American.com that speculates along very similar lines.
What if there are many people whose marginal product is so low that there is little social cost to their engaging in leisure rather than in work? How do we adapt to that? As Arthur puts it,
Perhaps some new part of the economy will come forward and generate a whole new set of jobs. Perhaps we will have short workweeks and long vacations so there will be more jobs to go around. Perhaps we will have to subsidize job creation. Perhaps the very idea of a job and of being productive will change over the next two or three decades.
I file these pieces under “Myth of the Macroeconomy” because they stress the importance of economic transformation, not aggregate demand and sticky nominal wages.