Research Report: March 28, 2019
By: Simeon Alder, Center for Research on the Wisconsin Economy
Abstract:
The decline of business dynamism in the United States has garnered considerable attention in recent years. Academic research has highlighted various aspects of this decline in dynamism, among them the rise in market share concentration, the aging of firms, the rise in mark-ups, or the disappearance of young, high-growth firms. In this report, we review the available data with a particular focus on Wisconsin’s entrepreneurial activity. In the process, we find that the lack of dynamism reported by the Kauffman indices, for example, is also on display in a number of other data sources like the Census’ Statistics of U.S. Businesses or its Quarterly Workforce Indicators. We use standard growth accounting methods and a simple theoretical framework introduced by Hopenhayn et al. (2018) in conjunction with Census data on Business Dynamics Statistics (BDS) to decompose the evolution of startup rates over time. The decline in employment growth, which in turn is driven by a decline in the labor force participation rate, the secular aging of the population, and a drop the population growth rate, can account for about 70 percent of the drop in startup activity since 1977, in Wisconsin as well as the United States more broadly. In a second step, we use development accounting methods to compare Wisconsin’s business dynamics to the broader trends in the United States. We find that Wisconsin’s low exit rate accounts for the bulk of the gap in startup activity. While we cannot identify the causes of Wisconsin’s low exit rate, it clearly is quantitatively important and in need of further research and policy attention.