I would like to think that the findings of the Kauffman Foundation, that the lower labor force participation rate we’ve seen since the end of the Great Recession results in fewer business startups, are correct:
The current U.S. labor force stands at a little under 158 million people, which represents a labor force participation rate of 62.6 percent (a tick up from October 2015, which was the lowest level in 30 years). Importantly, the growth of the labor force remained relatively flat for approximately 20 years until declining markedly since the Great Recession.
In both papers, the authors contend that the slowing growth rate of the labor force had negative consequences for startups because the startup rate is particularly sensitive to the labor supply. However, this slowing rate does not affect incumbent firm dynamics. With a reduction in startups, there are fewer new jobs because new and young firms are responsible for the vast majority of all net new jobs. This tightening of the labor market in turn shifts employment into incumbent firms. Incumbent firms grow stronger as a result, and the economic environment for startups worsens.
but it’s very difficult for me to believe that the causality doesn’t go in the opposite direction—that the drop in the LFPR is due to the small number of startups, i.e. there just aren’t enough jobs.
. . . the drop in the LFPR is due to the small number of startups, i.e. there just aren’t enough jobs.
That’s the way I see it.
But new and young firms are responsible for the vast majority of all net new jobs.
I want to see supporting data before I buy that. In particular I’d like to see data from periods outside the present “Great Recession.”
Mike
That data is widely available if you look for it. It has been linked here several times. It’s not even close. Large firms are lucky, in the aggregate, to even hold steady.
Yes, Mike. It’s not controversial. There’s overwhelming evidence and I’ve cited it here frequently.
Consider just one sector: automotive. At its peak there were 1.1 million people employed in the sector. GM alone employed 600,000 people. It employs 200,000 now.
Guarneri, Dave: I’m still mumbling about this to be honest. Yes, I know employment has tumbled in some industries, particularly recently, but I’m not convinced small young firms really make up the slack anywhere. But I respect the judgment of you guys. I’ll start adding “I’m very likely wrong” to my mumbles.
Thanks.