Report

US – The erosion in labor mobility and entrepreneurship since 2000 can be more accurately explained by weak demand

Academics and policymakers have recently focused on a worsening economic phenomenon commonly referred to as the decline in “business dynamism,” that is, the declining rate at which new businesses are formed and the rate at which they grow. This decline in dynamism and entrepreneurship accompanies a decline in overall labor market mobility, including quits and geographic migration for work, and has sparked a new literature on the subject by researchers including the Chairman of the President’s Council of Economic Advisors and numerous other academics, as well as extensive journalistic coverage. However, most of these analyses stress supply-side factors such as excessive occupational licensing and restrictions on building new housing. The data reject these supply-side interpretations, so this paper provides an alternative explanation for the recent trends of declining entrepreneurship, falling labor mobility, and rising concentration of employment in old firms and large firms.
The erosion in labor mobility and entrepreneurship since 2000 can be more accurately explained by weak demand, especially during the slow recovery from the two previous recessions. These economic trends, in turn, should be investigated and understood through a lens of power shifting in favor of the owners and managers of incumbent firms alongside rising profits and inter-firm inequality.

Key Findings

• If labor mobility or “dynamism” declines due to excessive regulation and an increasing cost of job-switching or of starting a new firm, then standard economic theory predicts wages and earnings should increase. But the data show that earnings have declined where the declines in dynamism and mobility have been worst, across both metropolitan areas and industries.
• The evidence shows that employed workers are getting fewer offers to work at other firms, reducing their leverage to demand raises from current employers and leading to wage and earnings stagnation on the job. If the problem were on the supply side, firms should be trying desperately (but without success) to recruit workers.
• The supply-side theory also implies that wages for workers who do manage to switch jobs should be going up. Instead, the data show that percentage wage increases for job-switchers have either stagnated or declined.
• The quit rate (or the rate of workers moving from one job to another) and the hiring rate from non-employment tend to move up and down in tandem.
To interpret our argument through the lens of a standard economic model of the labor market, the regulation story implies that the supply curve for labor has shifted left, at least in the increasingly regulated sectors and occupations. Supply shifts in the labor market would be expected to manifest as wages and employment moving in opposite directions. In other words, in increasingly regulated labor markets, we would expect to see wages go up and employment decline due to the scarcity of labor. The same basic intuition holds true in the search-and-matching model of a frictional labor market with a job ladder that we present in this paper.
Instead, this paper argues that the decline in mobility, dynamism, and entrepreneurship is a result of declining labor demand since 2000. When it is hard to find another job, employed workers stay at the jobs they have, impairing their ascent up the job ladder and the accompanying wage growth over careers that historically led to the middle class. Declining entrepreneurship can also be explained by workers’ reluctance to leave large, stable incumbents to start their own firm or to work at a start-up when they cannot be assured that they will be able to return to a more stable job. Thus, we find that the concentration of employment in old firms and in large firms mirrors the timing of declining labor mobility due to declining demand.
We find that quits and hires trended positively in the boom years of the 1990s, before the 2000 reversal also highlighted in the business dynamism literature. In short, these labor mobility and business dynamism measures are observations on the state of the labor market, like the employment-to- population ratio, wage growth, and the labor share of national income. Notwithstanding the fact that old firms account for a larger share of total quits, the share of quits that correspond to leaving an old firm to work at a start-up has declined, following the same ratcheting pattern as all the other labor indicators, including the quit rate itself.
Academics and policymakers have recently focused on a worsening economic phenomenon commonly referred to as the decline in “business dynamism,” that is, the declining rate at which new businesses are formed and the rate at which they grow. This decline in dynamism and entrepreneurship accompanies a decline in overall labor market mobility, including quits and geographic migration for work, and has sparked a new literature on the subject by researchers including the Chairman of the President’s Council of Economic Advisors and numerous other academics, as well as extensive journalistic coverage. However, most of these analyses stress supply-side factors such as excessive occupational licensing and restrictions on building new housing. The data reject these supply-side interpretations, so this paper provides an alternative explanation for the recent trends of declining entrepreneurship, falling labor mobility, and rising concentration of employment in old firms and large firms.
The erosion in labor mobility and entrepreneurship since 2000 can be more accurately explained by weak demand, especially during the slow recovery from the two previous recessions. These economic trends, in turn, should be investigated and understood through a lens of power shifting in favor of the owners and managers of incumbent firms alongside rising profits and inter-firm inequality.

Key Findings
• If labor mobility or “dynamism” declines due to excessive regulation and an increasing cost of job-switching or of starting a new firm, then standard economic theory predicts wages and earnings should increase. But the data show that earnings have declined where the declines in dynamism and mobility have been worst, across both metropolitan areas and industries.
• The evidence shows that employed workers are getting fewer offers to work at other firms, reducing their leverage to demand raises from current employers and leading to wage and earnings stagnation on the job. If the problem were on the supply side, firms should be trying desperately (but without success) to recruit workers.
• The supply-side theory also implies that wages for workers who do manage to switch jobs should be going up. Instead, the data show that percentage wage increases for job-switchers have either stagnated or declined.
• The quit rate (or the rate of workers moving from one job to another) and the hiring rate from non-employment tend to move up and down in tandem.

To interpret our argument through the lens of a standard economic model of the labor market, the regulation story implies that the supply curve for labor has shifted left, at least in the increasingly regulated sectors and occupations. Supply shifts in the labor market would be expected to manifest as wages and employment moving in opposite directions. In other words, in increasingly regulated labor markets, we would expect to see wages go up and employment decline due to the scarcity of labor. The same basic intuition holds true in the search-and-matching model of a frictional labor market with a job ladder that we present in this paper.
Instead, this paper argues that the decline in mobility, dynamism, and entrepreneurship is a result of declining labor demand since 2000. When it is hard to find another job, employed workers stay at the jobs they have, impairing their ascent up the job ladder and the accompanying wage growth over careers that historically led to the middle class. Declining entrepreneurship can also be explained by workers’ reluctance to leave large, stable incumbents to start their own firm or to work at a start-up when they cannot be assured that they will be able to return to a more stable job. Thus, we find that the concentration of employment in old firms and in large firms mirrors the timing of declining labor mobility due to declining demand.

We find that quits and hires trended positively in the boom years of the 1990s, before the 2000 reversal also highlighted in the business dynamism literature. In short, these labor mobility and business dynamism measures are observations on the state of the labor market, like the employment-to- population ratio, wage growth, and the labor share of national income. Notwithstanding the fact that old firms account for a larger share of total quits, the share of quits that correspond to leaving an old firm to work at a start-up has declined, following the same ratcheting pattern as all the other labor indicators, including the quit rate itself.

Capture d’écran 2016-08-08 à 08.30.38

Moreover, as the graphic above shows, the labor markets where mobility has decreased the most are the ones where earnings have as well. This is true by metropolitan area and true for both all workers and just newly hired workers. This evidence bolsters an increasing body of research that argues the reason for wage stagnation even within employment matches is that wages are renegotiated less frequently now and are less sensitive to outside job offers because those seldom occur.

This alternative analysis suggests future research should investigate potential policy-related causes of those trends in demand and market structure—such as declining effective marginal tax rates on high earners and a permissive environment for inter-firm mergers—that deemphasize full employment and market competition.

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