The slowdown in essentially all of these processes is seen in declining rates of creation and destruction of both firms and jobs.
Start-ups: Start-ups are a key driver of productivity growth. Although it may feel that we are living in an age of disruption, the birthrate of startups has actually been in decline since the 1970s. New firms can be loosely grouped into two categories: those started by "lifestyle entrepreneurs" who want to be their own boss, but who have little prospect or desire for high growth; and those founded by transformational entrepreneurs who start businesses that aspire to grow dramatically and change their industry. Before 2000, the decline in new firm entry was mainly in the first sort; since 2000, it is also found among the so-called transformational firms. While the drop in the formation of lifestyle-type firms could be neutral or even a positive for productivity, as in the case of the U.S. retail sector, the reduction in the creation of high-performance new firms suggests that lower dynamism could be associated with slower productivity growth.
Labor Market Dynamism: While changing jobs can be painful, job changes in the aggregate are associated with higher compensation, implying higher productivity. But the rewards to job change may have declined. Fewer start-ups has meant lower "job flows," as measured by job creation and destruction, and fewer opportunities for workers to find better jobs. And labor market dynamism across many dimensions has declined by more than can be explained by the reduction in startups. Workers have become less likely to leave their jobs, change jobs, or move geographically to take new jobs.
Dynamism is a relatively new field of inquiry, and there is no consensus yet on the reasons for, or implications of, these developments...
It may be that some government policies, while well intended, have contributed to these trends. One example that may explain a small portion of the reduction in dynamism is the substantial increase in occupational licensing. By some estimates, the fraction of workers who are required to hold a government issued license or certification to perform their jobs has risen from 5 percent in the 1950s to close to 40 percent. Like many policies, licensing has benefits and costs. Among the costs are that it tends to reduce job switching and employment opportunities for excluded workers, and may restrict competition and thus increase prices faced by consumers. Among the benefits may be higher quality products and services and improved health and safety standards. Some researchers have advanced the view that licensing requirements have become overly burdensome and may have contributed to the secular decline in job and worker reallocation.
Dynamism is a fast-developing field of research, and it will be important that public policy react appropriately as this work continues. It goes without saying that economic policymakers should use all available information and tools to create a supportive environment for growth. We need policies that support labor force participation and the development of skills, business hiring and investment, and productivity growth. For the most part, these policies are outside the remit of the Federal Reserve, but monetary policy can contribute by supporting a strong and durable expansion, in a context of price stability.