Declining Dynamism, Allocative Efficiency, and the Productivity Slowdown

A large literature documents declining measures of business dynamism including high-growth young firm activity and job reallocation. A distinct literature describes a slowdown in the pace of aggregate labor productivity growth. We relate these patterns by studying changes in productivity growth from the late 1990s to the mid 2000s using firm-level data. We find that diminished allocative efficiency gains can account for the productivity slowdown in a manner that interacts with the within-firm productivity growth distribution. The evidence suggests that the decline in dynamism is reason for concern and sheds light on debates about the causes of slowing productivity growth. ∗Board of Governors of the Federal Reserve System, University of Maryland and NBER, U.S. Census Bureau, and U.S. Census Bureau, respectively. We gratefully acknowledge financial support from the Kauffman Foundation. Cody Tuttle provided excellent research assistance. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau or of the Board of Governors or its staff. All results have been reviewed to ensure that no confidential information is disclosed. Evidence of declining entrepreneurship and labor market fluidity has captured wide interest among researchers and policymakers. Startup rates and other measures of young firm activity have declined since the 1980s, with accelerated slowdowns in high-growth young firm activity since 2000. Gross job and worker flows have declined over the same period including marked drops since the early 2000s. These patterns are particularly notable in the High Tech sector, which saw rising dynamism during the 1990s before declining sharply after 2000 (Decker et al. (2016)). A distinct literature describes a decline in the growth rate of aggregate productivity since the early 2000s (Byrne, Fernald and Reinsdorf (2016); Gordon (2016); Syverson (2016)). An important omission from much of the productivity slowdown literature is the notion that aggregate productivity depends not only on technology but also on allocative efficiency—the continual movement of resources to their most productive uses. Decker et al. (2017) document declining establishment-level responsiveness of growth to productivity and show that a weakening of the growth-productivity relationship at the business level has had potentially large implications for aggregate productivity growth while also helping explain falling rates of job reallocation. Moreover, within-industry dispersion of labor productivity—a popular (if limited) indicator of efficiency frictions—has risen since the late 1990s. In the present study, we provide further evidence linking the problem of slowing productivity growth to declining business dynamism. Using firm-level data on labor productivity, we construct accounting decompositions to show that dampened growth in allocative efficiency can account for much of the decline in aggregate productivity growth between the late 1990s and the mid 2000s; more specifically, the slowdown reflects inefficient allocation of productive resources as well as the interaction between allocation and slowing within-firm productivity growth. Our findings imply that, consistent with the conclusions of Decker et al. (2017), declining business dynamism since 2000 is likely a drag on American living standards. Moreover, our findings suggest a reevaluation of the productivity slowdown debate, which has until now focused on technological versus measurement explanations. 1 A microdata approach Our dataset, the RE-LBD, combines the industry and employment data of the Census Bureau’s Longitudinal Business Database (LBD) with revenue data from tax records (Haltiwanger et al. (2016)). The integrated data allow us to measure gross revenue labor productivity at the firm level for virtually the entire U.S. private nonfarm economy; we apply propensity score weights to account for imperfect match rates between revenue and employ-