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.
- 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.
Also published on Medium.