Abstract:
This paper studies the causes of the declining startup rate over the past three decades. The stability of firms’ lifecycle dynamics throughout this period along with the widespread nature of the declining startup rate place strong restrictions on potential explanations. We show that declines in the growth rate of the labor force, which peaks in the late 1970s, explain an important share of the startup rate decline while leaving incumbent dynamics unaffected. Using cross-sectional demographic variation we estimate a quantitatively and statistically significant labor supply growth elasticity of the startup rate, which is robust to alternative explanations. Finally we show that the equilibrium response to a permanent demographic shift in a standard Hopenhayn (1992) setting matches the steady decline in the U.S. startup rate over the last 30 years without additional frictions. This success also has implications for a debate over scale effects in endogenous growth models, suggesting the fixed costs must scale with aggregate productivity. Overall, our findings suggest that the decline in the growth rate of the working age population, reinforced by steadying female labor force participation through their general equilibrium effects on firm dynamics are an important driver of the decline in firm entry.
Host: Hans Holter