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New York — U.S. business dynamism, a hallmark of the American economy, is in decline, said Patrick T. Harker, president and CEO of the Federal Reserve Bank of Philadelphia, on Thursday. Harker was addressing the New York Association for Business Economics. The economic measure of dynamism “is defined by turnover: New businesses enter the market and others leave, workers move from job to job, people come in and out of the workforce, and so on.”
The fall in dynamism is evident in measures on both the firm and worker sides and may be due to a host of factors, Harker noted, including business environments that impede the reallocation of labor and capital. And while new evidence suggests little role for large scale regulation, it is possible that the collective pressures of small burdens — from local zoning restrictions impeding entrepreneurial growth in major innovation hubs to cost of living in such cities to the increase in requirements for government-issued occupational licensing — are having an impact. Additionally, those factors affecting other areas of the economy, including technological advancement, demographics, and measurement issues, are also likely having an effect.
Dynamism is important because this “perpetual churn makes resources more fluid, and they move around with relative ease. As labor and capital are freed to flow from the least to the most productive firms, productivity, wages, and overall economic growth increase.”
On the firm side, he said, “high productivity firms grow faster than low productivity ones and contribute to a country’s overall productivity growth.” On the worker side, “More fluid labor markets ease the path up the job ladder, allow workers to find better matches for their skills, and can encourage attachment to the labor force. As the labor market continues to tighten, and we need every person possible participating in the workforce, that becomes increasingly important.”