Haltiwanger’s ‘Startup Deficit’

sep haltiThe work of John Haltiwanger, an economics professor at the University of Maryland, in deepening our understanding of the causes of job creation, job destruction and economic performance serves as one of the best examples of how to elevate the quality of research informing a new class of policymakers drilling down on entrepreneurship as a driver of jobs and innovation.

Haltiwanger’s book, Job Creation and Destruction, is “the definitive, authoritative, and the most influential work in its field and the starting point for a rich body of work on the subject,” according to Imperial College’s Jonathan Haskel, who until recently served on the United Kingdom’s Competition Commission. By examining the microdata that underpins aggregate measures such as GDP, productivity growth, and unemployment rates, the professor’s seminal book is credited with fundamentally altering how economists view labor markets.

It should not be a surprise therefore that despite a Papal visit last week, a standing room only briefing featuring Haltiwanger attracted Senators and senior staff.

Using his deep understanding of new business dynamics and the determinants of job creation, he challenged conventional thinking that small and medium businesses are the engines of job creation. 

It is not small firms per se, but a subset of small firms,” he explained to the overflowing audience, “new, young, high-growth startups – the ones that are experimenting, innovating new products anservices and trying to figure out new business models that are disproportionately responsible for the great majority of new job creation.sep chart1

Even though many new and young firms do not succeed, they contribute to economic vitality through a churning effect. A ‘startup deficit,’ that is a decline in the entry rate, and a consequently stark decline in the share of young businesses, is therefore particularly worrisome because it indicates that the dynamic of waves of entrants coming in, some succeeding and growing very rapidly, and making substantial, long-lasting contributions to net job creation (as well as to revenue and productivity growth) has slowed down.

It is also disturbing because of the role that the organic process of new firm formation plays in accelerating the individual performance of the founder teams who engage in experiments to birth the new. Regardless of whether the firm succeeds, is acquired or dies, the founder teams are better positioned to either continue in a serial firm creation process or simply be better employees in keeping existing or larger firms more dynamic.

Beginning with the dot-com bust in 2000, and perhaps exacerbated by the uncertainty created first by 9/11 and then the 2008 financial crisis, the trend line plotted by analyzing longitudinal firm-level microdata has been declining for more than a decade. As Haltiwanger explained it, “when the birth rate declines, you later have fewer people engaged in economic activity.”

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For policymakers, his finding that high growth firms are more likely to be young than mature, even when controlling for firm size, has many implications for action on Capitol Hill.

Last Tuesday’s briefing is an example of the increasing attention in Washington to these data. Senators Jerry Moran (R-Kansas) and Chris Coons (D-Delaware) who convened the briefing together with the Kauffman Foundation highlighted how a recently-formed bipartisan Senate Competitiveness Caucus is working to develop smarter policies that not only address the causes of the deficit, but alleviate its effects, which include stalled labor force participation, wage stagnation and low productivity growth.

Senator Moran emphasized on Tuesday how we cannot underestimate how entrepreneurship has contributed to America’s economic competitiveness “by bringing new ideas to life and challenging existing businesses with innovative ways of making and delivering goods.” America’s entrepreneurs, he said, remain the engines of job creation and economic growth.

Senator Coons noted that he too had concluded that new business creation has fallen off pace, something that is particularly evident in his home state of Delaware, the first choice for a great majority of new business filings. America is facing “a competitive inflection point” he said. “While our culture of innovation and entrepreneurial spirit remain strong, the policy framework that empowers that spirit to flourish is losing its competitive edge.” Senator Coons went so far as to say that “entrepreneurship is the key to American competitiveness in the 21st Century,” adding that the Caucus will examine policy alternatives that “do more to nurture and take advantage of our strengths” while making sure that government allows a clear path for entrepreneurs to pursue their ideas.

Haltiwanger’s research provides a solid reason for more urgency in acting on some of the ideas discussed in this blog. For example, how to better enable commercialization of new knowledge, how to increase entrepreneurial density, or how to limit the ability of incumbents to crowd out new entrants. It validates why we need more ideas for example around how to increase fluidity – the ability of individuals to freely decide their line of work, move between jobs, relocate to a new city and chose to start new businesses as previously discussed in this blog.

In the Policy Dialogue on Entrepreneurship and other Kauffman publications, we will continue to discuss these and other options for policymakers at all levels of government. What is certain is we need more scholarship like that of John Haltiwanger if we are to respond with certitude to congressional interest in credible analysis and insights about what drives the dynamics of our entrepreneurial economy.

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