Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / Why Young Firms Are Disappearing and Stalling Productivity Growth
Transcript
- Lucas: Fifty years ago, roughly half of all U.S. firms were less than five years old. Today, that number is closer to one in three. And that shift might be one of the biggest hidden drags on productivity growth across the economy. Luna: Wait — so we're talking about business startups specifically? Young companies drive productivity because they're the ones bringing new ideas, right? Lucas: Exactly. The data is from economists like John Haltiwanger at the University of Maryland and Ryan Decker at the Fed. They've been tracking what's called 'business dynamism' — the rate at which firms are born, grow, shrink, and exit. And across almost every sector, that dynamism has been declining since the early 2000s. Luna: And this matters for productivity because the old firms are getting, well, old? They're less likely to innovate? Lucas: That's part of it. Young firms are disproportionately responsible for breakthrough innovations and for reallocating resources from less efficient to more efficient uses. When a startup disrupts an incumbent, capital and labor move to higher-productivity activities. But that churn has slowed. According to Haltiwanger and his co-authors, the share of employment at young firms fell from about 20 percent in the 1980s to around 11 percent by the 2010s. Luna: That's a huge drop. So what's causing it? Is it harder to start a business now? Lucas: It's not that it's harder to incorporate — you can register an LLC online in minutes. But the competitive landscape is more concentrated. A handful of superstar firms dominate many industries, and they have advantages in scale, data, and network effects that make it harder for newcomers to gain a foothold. There's also research showing that occupational licensing and zoning regulations have proliferated, which raise the cost of entry, especially in services. Luna: And what about the nature of innovation itself? Some argue that we're in a period of more incremental innovation — less of the big breakthroughs that create entirely new industries. Lucas: That's a related hypothesis — the 'low-hanging fruit' idea, popularized by economist Robert Gordon. He argues that the digital revolution's biggest productivity gains are behind us. But the declining dynamism story is distinct. It's about the structure of markets, not the pace of invention. Even if a startup has a great idea, it faces higher barriers to scaling. And the big firms can either copy the idea or acquire the startup before it becomes a threat. Luna: Right — the so-called 'kill zone.' Big tech firms can acquire potential competitors. That's been a big antitrust concern. Lucas: Precisely. And the data shows that the decline in dynamism is most pronounced in high-tech sectors, which is exactly where you'd expect young firms to be most important for productivity. One study found that the startup share of employment in ICT — information and communications technology — fell from over 30 percent in the early 1980s to under 10 percent in the 2010s. Luna: So what does this mean for overall productivity growth? Can we quantify the impact? Lucas: Economists have tried. One estimate from a paper by economists at the Federal Reserve Bank of Kansas City suggests that the decline in dynamism — specifically the reduced reallocation of labor from low-productivity to high-productivity firms — may account for roughly a quarter to a third of the productivity growth slowdown since the early 2000s. That's significant. It's not the whole story, but it's a big piece. Luna: So if we want to boost productivity, one lever is to make it easier for young firms to compete. What does that look like in practice? Lucas: Policies that reduce regulatory barriers — streamlined licensing, zoning reform to allow more commercial space, changes to non-compete agreements which can lock workers into incumbents. Antitrust enforcement that is more skeptical of acquisitions by dominant firms. Also, better access to capital for early-stage startups, especially outside of a few superstar cities. The Kauffman Foundation has a lot of research on this. Luna: And that's where the conversation often gets political. Lucas: You know, digging into this kind of research — tracking firm-level data, understanding these trends — it's the kind of thing that doesn't always make headlines. But it's incredibly important for understanding where the economy is headed. And frankly, it's the kind of deep-dive reporting that listener support makes possible. Luna: Yeah. And that's a good reminder — a small number of our listeners already chip in monthly through buy me a coffee dot com slash fexingo, and that directly funds our ability to produce episodes like this, ad-free. Lucas: Exactly. So if walking through the economy with us has made something click, that's where you can find us. No pressure, just a way to keep this going. Luna: Alright — back to the data. So what's the policy path that's actually feasible? Lucas: One specific proposal that's gained traction is reforming occupational licensing. A 2015 White House report estimated that licensing raises consumer prices by 3 to 16 percent and reduces job mobility. That's a direct choke on dynamism. Luna: And there's been some action at the state level. Arizona, for example, passed universal licensing recognition in 2019, making it easier for workers licensed in other states to practice. That kind of reform could help. Lucas: Right. And on the antitrust side, there's increasing attention on the 'kill zone' — the idea that dominant firms acquire startups preemptively. The FTC and DOJ have updated merger guidelines to take a harder look at vertical and conglomerate mergers, especially those involving potential competitors. That could make a difference. Luna: But is there evidence that these policies would actually increase the startup rate and, ultimately, productivity growth? Lucas: The academic evidence is still accumulating, but there are promising signs. A study of occupational licensing reform in several states found that it boosted entry into licensed professions by about 10 percent. And research on non-compete bans — like the one Hawaii passed in 2015 for tech workers — showed increased startup formation and worker mobility. It's not a silver bullet, but the direction is clear. Luna: So the declining share of young firms is reversible. It's not a natural law. Lucas: Exactly. The U.S. had high dynamism for decades, and it declined largely due to policy choices and market structure. That means we can make different choices. The challenge is political will, but the economic payoff — faster productivity growth, higher wages, more innovation — is substantial. Luna: And that's the kind of systemic change that often gets overlooked in the day-to-day economic headlines. Lucas: It does. But it's exactly the kind of structural factor that determines long-run prosperity. The decline of young firms may not be as visible as a stock market dip, but in many ways, it's more consequential. Luna: Well, hopefully this episode shines a light on it. Thanks for walking through the data with us. Lucas: My pleasure. That's all for this episode of The Productivity Podcast. Until next time.