Is business dynamism on a permanent decline?

Last year I wrote a post (“Is America the best place on Earth for entrepreneurs?”) that looked at some worrisome trends suggesting a decline in U.S. entrepreneurship. This was based on data compiled by the Organization for Economic Cooperation and Development and the Global Entrepreneurship Monitor (GEM) that ranks countries on startup rates and innovation.

Business dynamism - Brookings Institution

Graph showing decline in business dynamism from Brookings Institution.

Now comes a troublesome new study from the Brookings Institution by economists Ian Hathaway and Robert Litan that says more businesses are dying than being created in the U.S.

Hathaway and Litan analyzed business dynamism over a 33-year period (1978-2011) and concluded that dynamism is slowing down in all 50 states and nearly every metropolitan area, to the point where firm exits exceed firm entries.

As the two explained in their paper:

Business dynamism is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over. Research has firmly established that this dynamic process is vital to productivity and sustained economic growth. Entrepreneurs play a critical role in this process, and in net job creation.

But recent research shows that dynamism is slowing down. Business churning and new firm formations have been on a persistent decline during the last few decades, and the pace of net job creation has been subdued. This decline has been documented across a broad range of sectors in the U.S. economy, even in high-tech.

While the reasons explaining this decline are still unknown, if it persists, it implies a continuation of slow growth for the indefinite future, unless for equally unknown reasons or by virtue of entrepreneurship enhancing policies (such as liberalized entry of high-skilled immigrants), these trends are reversed.

Many commentators were quick to insert their own explanations for the decline, such as increased government regulation, or complain about “Obamanomics.” But in an interesting follow-up to their study, Hathaway and Litan noted that the decline has been steady, spanning both Republican and Democratic administrations, and that there really is no clear explanation—yet—for what is happening.

Being self-employed, I take a greater interest in these things than I once did, and I have to wonder if sole proprietors are counted as firms in the research. That may have some bearing, especially in light of several other employment trends that are beginning to have an impact on our economy:

  • Last year, I also wrote about the rise of the freelance nation. According to Ford Motor Company’s “13 Trends for 2013,” there are now 42 million freelancers in the U.S. As Ford noted, “Today’s contract workers are lawyers, journalists, daycare workers, graphic artists, accountants, videographers…” Ford calls this trend “The Micro Skills DIY” and says, “Versatility, nimbleness and agility are necessities in today’s shifting economic climate, where staid manufacturing jobs have been replaced by fast-moving technological ones.”
  • I recently was doing research for a client white paper and was fascinated by another employment trend known as encore or second-act careers. Baby Boomers, in particular, are eschewing the normal retirement path and deciding to continue working, only they want to do something more meaningful the second time around. The MetLife Foundation says as many as 31 million people between the ages of 44 and 70 are looking for encore employment that combines meaningful work with social impact and continued income. Many of these encore careers involve starting a business or nonprofit.

It would seem to me that these two trends might counterbalance the slump in business dynamism that the Brookings study describes. However, it may be that something more structural is going on. Let’s hope dynamism is simply in a state of flux, in which case, we might see some improvement in the coming years.

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