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Business Applications as a Leading Economic Indicator?
May 2021
Working Paper Number:
CES-21-09R
How are applications to start new businesses related to aggregate economic activity? This paper explores the properties of three monthly business application series from the U.S. Census Bureau's Business Formation Statistics as economic indicators: all business applications, business applications that are relatively likely to turn into new employer businesses ('likely employers'), and the residual series -- business applications that have a relatively low rate of becoming employers ('likely non-employers'). Growth in applications for likely employers significantly leads total nonfarm employment growth and has a strong positive correlation with it. Furthermore, growth in applications for likely employers leads growth in most of the monthly Principal Federal Economic Indicators (PFEIs). Motivated by our findings, we estimate a dynamic factor model (DFM) to forecast nonfarm employment growth over a 12-month period using the PFEIs and the likely employers series. The latter improves the model's forecast, especially in the years following the turning points of the Great Recession and the COVID-19 pandemic. Overall, applications for likely employers are a strong leading indicator of monthly PFEIs and aggregate economic activity, whereas applications for likely non-employers provide early information about changes in increasingly prevalent self-employment activity in the U.S. economy.
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Entrepreneurial Teams: Diversity of Skills and Early-Stage Growth
December 2020
Working Paper Number:
CES-20-45
We use employer-employee linked data to track the employment histories of team members prior to startup formation for a full cohort of new firms in the U.S. Using pre-startup industry experience to measure skillsets, we find that startups that have founding teams with more diverse collective skillsets grow faster than peer firms in the same industries and local economies. A one standard deviation increase in teams' skill diversity is associated with an increase in five-year employment (sales) growth of 16% (10%) from the mean. The effects are stronger among startups in innovative industries and among startups facing greater ex-ante uncertainty. Moreover, the results are robust to a variety of approaches to address the endogeneity of team composition. Overall, our results suggest that teams with more diverse collective skillsets adapt their strategies more successfully in the uncertain environments faced by (innovative) startup firms.
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Business Dynamics on American Indian Reservations: Evidence from Longitudinal Datasets
November 2020
Working Paper Number:
CES-20-38
We use confidential US Census Bureau data to analyze the difference in business establishment dynamics by geographic location on or off of American Indian reservations over the period of the Great Recession, and subsequent recovery (2007-2016). We geocoded U.S. Census Bureau's Longitudinal Business Database, a dataset with records of all employer business establishments in the U.S. for location in an American Indian Reservation and used it to examine whether there are differences in business establishment survival rates over time by virtue of their location. We find that business establishments located on American Indian reservations have higher survival rates than establishments located in comparable counties. These results are particularly strong for the education, arts and entertainment, wholesale and retail, and public administration industries. While we are not fully able to explain this result, it is consistent with the business establishments being positively selected with respect to survival given the large obstacles necessary to start a business on a reservation in the first place. Alternatively, there may be certain safeguards in a reservation economy that protect business establishments from external economic shocks.
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A Shore Thing: Post-Hurricane Outcomes for Businesses in Coastal Areas
September 2020
Working Paper Number:
CES-20-27
During the twenty-first century, hurricanes, heavy storms, and flooding have affected many areas in the United States. Natural disasters and climate change can cause property damage and could have an impact on a variety of business outcomes. This paper builds upon existing research and literature that analyzes the impact of natural disasters on businesses. Specifically, we look at the differential effect of eight hurricanes during the period 2000-2009 on establishments in coastal counties relative to establishments in coastal-adjacent or inland counties. Our outcomes of interest include establishment employment and death. We find that following a hurricane event, establishments located in a coastal county have lower employment and increased probability of death relative to establishments in non-coastal counties.
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Compositional Nature of Firm Growth and Aggregate Fluctuations
March 2020
Working Paper Number:
CES-20-09
This paper studies firm dynamics over the business cycle. I present evidence from the United Kingdom that more rapidly growing firms are born in expansions than in recessions. Using administrative records from Census data, I find that this observation also holds for the last four recessions in the United States. I also present suggestive evidence that financial frictions play an important role in determining the types of firms that are born at different stages of the business cycle. I then develop a general equilibrium model in which firms choose their managers' span of control at birth. Firms that choose larger spans of control grow faster and eventually get to be larger, and in this sense have a larger target size. Financial frictions in the form of collateral constraints slow the rate at which firms reach their target size. It takes firms longer to get up to scale when collateral constraints tighten; therefore, businesses with the largest target size are affected disproportionately more. Thus, fewer entrepreneurs find it profitable to choose larger projects when financial conditions deteriorate. Using Bayesian methods, I estimate the model using micro and aggregate data from the United Kingdom. I find that financial shocks account for over 80% of fluctuations in the formation of businesses with a large target size, and TFP and labor wedge shocks account for the remaining 20%. An independently estimated version of the model with no choice over the span of control needs larger aggregate shocks in order to account for the same data series, suggesting that the intensive margin of business formation is important at business cycle frequencies. The model with the choice over the span of control generates an empirically relevant and non-targeted collapse in the right tail of the cumulative growth distribution among firms started in recessions, while the model without such a choice does not. The paper also discusses implications for micro-targeted government stimulus policies.
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Demographic Origins of the Startup Deficit
July 2019
Working Paper Number:
CES-19-21
We propose a simple explanation for the long-run decline in the startup rate. It was caused by a slowdown in labor supply growth since the late 1970s, largely pre-determined by demographics. This channel explains roughly two-thirds of the decline and why incumbent firm survival and average growth over the lifecycle have been little changed. We show these results in a standard model of firm dynamics and test the mechanism using shocks to labor supply growth across states. Finally, we show that a longer startup rate series imputed using historical establishment tabulations rises over the 1960-70s period of accelerating labor force growth.
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Statistics on the Small Business Administration's Scale-Up America Program
April 2019
Working Paper Number:
CES-19-11
This paper attempts to quantify the difference in performance, of 'treated' (program participant) and 'non-treated' (non-participant) firms in SBA's Scale-Up initiative. I combine data from the SBA with administrative data housed at Census using a combination of numeric and name and address matching techniques. My results show that after controlling for available observable characteristics, a positive correlation exists between participation in the Scale-Up initiative and firm growth. However, publicly available survey results have shown that entrepreneurs have a variety of goals in-mind when they start their businesses. Two prominent, and potentially contradictory ones are work-life balance and greater income. That means that not all firms may want to grow and I am unable to completely control for owner motivations. Finally, I do not find a statistically significant relationship between participation in Scale-Up and firm survival once other business characteristics are accounted for.
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Labor Market Concentration, Earnings Inequality, and Earnings Mobility
September 2018
Working Paper Number:
carra-2018-10
Using data from the Longitudinal Business Database and Form W-2, I document trends in local industrial concentration from 1976 through 2015 and estimate the effects of that concentration on earnings outcomes within and across demographic groups. Local industrial concentration has generally been declining throughout its distribution over that period, unlike national industrial concentration, which declined sharply in the early 1980s before increasing steadily to nearly its original level beginning around 1990. Estimates indicate that increased local concentration reduces earnings and increases inequality, but observed changes in concentration have been in the opposite direction, and the magnitude of these effects has been modest relative to broader trends; back-of-the-envelope calculations suggest that the 90/10 earnings ratio was about six percent lower and earnings were about one percent higher in 2015 than they would have been if local concentration were at its 1976 level. Within demographic subgroups, most experience mean earnings reductions and all experience increases in inequality. Estimates of the effects of concentration on earnings mobility are sensitive to specification.
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Firm Leverage, Labor Market Size, and Employee Pay
August 2018
Working Paper Number:
CES-18-36
We provide new estimates of the wage costs of firms' debt using an empirical approach that exploits within-firm geographical variation in workers' expected unemployment costs due to variation in local labor market in a large sample of public firms. We find that, following an increase in firm leverage, workers with higher unemployment costs experience higher wage growth relative to workers at the same firm with lower unemployment costs. Overall, our estimates suggest wage costs are an important component in the overall cost of debt, but are not as large as implied by estimates based on ex post employee wage losses due to bankruptcy; we estimate that a 10 percentage point increase in firm leverage increases wage compensation for the median worker by 1.9% and total firm wage costs by 17 basis points of firm value.
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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
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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