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Older and Slower: The Startup Deficit's Lasting Effects on Aggregate Productivity Growth

June 2018

Working Paper Number:

CES-18-29

Abstract

We investigate the link between declining firm entry, aging incumbent firms and sluggish U.S. productivity growth. We provide a dynamic decomposition framework to characterize the contributions to industry productivity growth across the firm age distribution and apply this framework to the newly developed Revenue-enhanced Longitudinal Business Database (ReLBD). Overall, several key findings emerge: (i) the relationship between firm age and productivity growth is downward sloping and convex; (ii) the magnitudes are substantial and significant but fade quickly, with nearly 2/3 of the effect disappearing after five years and nearly the entire effect disappearing after ten; (iii) the higher productivity growth of young firms is driven nearly exclusively by the forces of selection and reallocation. Our results suggest a cumulative drag on aggregate productivity of 3.1% since 1980. Using an instrumental variables strategy we find a consistent pattern across states/MSAs in the U.S. The patterns are broadly consistent with a standard model of firm dynamics with monopolistic competition.

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macroeconomic, estimating, industrial, sale, productivity growth, growth, entrepreneurship, industry productivity, monopolistic, growth productivity, longitudinal, recession, employment growth, revenue, spillover, wages productivity, industry wages, gdp, productivity dynamics, declining, decade, aging

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Metropolitan Statistical Area, Internal Revenue Service, Bureau of Labor Statistics, Ordinary Least Squares, Labor Productivity, Bureau of Economic Analysis, Census Bureau Longitudinal Business Database, Longitudinal Business Database, Employer Identification Numbers, New York University, North American Industry Classification System, Census Bureau Business Register, Business Register, State Energy Data System, Business Dynamics Statistics, Census Bureau Business Dynamics Statistics

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