UNIDENTIFIED PERSON, BYLINE: NPR.
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DARIUS RAFIEYAN, BYLINE: So for a long time, the U.S. economy has had a reputation as a really dynamic economy, an economy that is always changing, with entrepreneurs inventing new products, people starting new companies all the time - hypercompetitive - and workers switching jobs to move up the professional ladder.
CARDIFF GARCIA, HOST:
Yeah, this is a kind of part of the American myth, or at least it's been a popular narrative, that we are striving, restless, always reinventing ourselves in new places, new careers, new lines of work and expanding across new frontiers. Darius, those are geographic and metaphorical frontiers, I would add.
RAFIEYAN: Yeah, and it's not just a myth. I mean, the U.S. does have one of the most dynamic economies in the world. And it has innovative companies that are the envy of the world. And yet, in the last few decades, something has happened. That dynamism, that distinctive American dynamism, appears to be in decline.
I'm Darius Rafieyan.
GARCIA: And I'm Cardiff Garcia. Today on THE INDICATOR FROM PLANET MONEY, three indicators showing that dynamism in the U.S. is actually falling, why that matters so much and also what policymakers can do to reinvigorate it.
OK, Darius, before we start talking about economic dynamism, we need to define it. So basically, dynamism is when there's a lot of healthy competition between businesses in the economy. And the way businesses compete is, of course, to make better products to sell to us and also by coming up with better ways of making those products.
RAFIEYAN: And at any given time, some businesses are winning that competition - making money, hiring people, growing - and some businesses are losing and dying off. You know, Netflix becomes a streaming powerhouse. Blockbuster files for bankruptcy. And dynamism also applies to workers because switching jobs and finding new jobs where your skill set and your personality will be valued is often the best way for workers to realize wage gains and more fulfilling jobs. So workers having options about where they can take their skills is also part of dynamism.
GARCIA: And to measure dynamism in the U.S. economy, we spoke with Ryan Nunn. He's an economist and the policy director at The Hamilton Project, which is a part of the Brookings Institution, a think tank. Ryan brought us three indicators that showed just how dynamism in the U.S. is falling.
RAFIEYAN: First indicator - the startup rate. This is the share of all businesses in the U.S. that are startups, which means they were founded in the past year. Back in 1994, 11% of all businesses were startups. According to the most recent estimate available, that number fell to just 8.4% percent a few years ago. Ryan says that is a substantial fall.
RYAN NUNN: And, you know, that decline that happened across the entire U.S. has occurred in every major industrial sector - you know, manufacturing services, retail and every other industry.
RAFIEYAN: If the share of startups had stayed the same as it was back in the mid-'90s, there would be 135,000 extra startups every year in the U.S. Startups are just becoming a smaller share of the U.S. economy.
GARCIA: Economists don't all agree on just why this is happening. Some argue that it's because the population is not growing as fast as it used to, so there are just fewer customers for new companies to sell to then if the population had kept growing just as fast as it had been - not to mention fewer potential entrepreneurs to start companies in the first place.
RAFIEYAN: Other economists say that older companies have just made it harder for new companies to compete with them by lobbying for new regulations or by just buying up smaller rivals before they can really become competitive. Whatever the case, Ryan says it really matters that we are missing all these young firms in the economy.
NUNN: There's a lot of good research on this recently. But the basic idea is that young firms, or at least a fraction of the young firms, are particularly likely to grow very quickly, hire a lot of workers to produce a lot of productivity growth. And all of this matters for overall economic growth and for wage growth as well.
GARCIA: Young firms represent competition for older firms, for the incumbents. They keep them sharp. And that competition forces all companies to invest money in research, in training their workers and in giving workers the tools they need to do their jobs. Streaming services like Netflix and Hulu, they didn't just bankrupt Blockbuster. They also forced movie theaters to invest in making the experience of seeing a movie on the big screen more pleasant - comfier chairs, better snacks. Darius, there are places where you can get dinner and a beer. It's not bad.
RAFIEYAN: (Laughter) And, you know, young firms are another option for workers to find a job and for workers to experience a workplace with an entrepreneurial approach, which could help them start their own businesses one day.
GARCIA: So that's indicator No. 1 - the startup rate. The second indicator showing that economic dynamism has fallen has to do with job switching, or how often people leave their job to take another job.
NUNN: I think, again, the prevailing narrative is that Americans are ever more likely to switch jobs. That's not the case. Workers are actually less likely to switch jobs than they once were.
RAFIEYAN: Ryan looked at people between the ages of 25 and 54 who had jobs. These are people in their so-called prime working years. And then he looked at how many of those people had changed employers at least once during the past year.
GARCIA: Right. So go back to 1994 again. That year, 13% of these prime working age people switched jobs at least once. Fast forward to last year, and it was only 11% of those workers who switched jobs. Now that may not sound like a big decline, but it means that 2 million fewer people switched jobs last year than if the job-switching rate had stayed the same. Ryan says this could be holding down the wages of a lot of workers.
NUNN: At the most basic level, you know, you see bigger wage increases for those who are switching jobs, and particularly for those who are switching jobs and moving across states. But in general, we think of that job switching as being part of the engine of wage growth and a way that workers sort of climb the job ladder.
RAFIEYAN: So there's less job switching than there used to be. And here is the third indicator of declining economic dynamism. It has to do with people moving from one state in the U.S. to another. And again, Ryan looked at those same people in their prime working years and looked at how often they had moved across state lines from the year 1994 to the year 2017.
NUNN: The fraction of people in that age group who are moving across states declined by almost a third over that period.
GARCIA: OK, and why is this important?
NUNN: So it's important for some of the reasons we've already discussed, that being able to find that best match for your skills often does require a longer distance move. If you, you know, are restricted to one local area, you're not going to be able to consider the whole range of possible opportunities.
GARCIA: So those are the three indicators of dynamism in decline. And one tough question we have to address here is, what might be causing it? Well, we already mentioned the slowing population growth and older companies trying to block new companies from growing. But there are other possibilities.
NUNN: Which include non-compete agreements, which make it harder for a worker to switch from one company to a rival company. Housing costs in cities where a lot of the good jobs are have become super expensive, so workers from other states who would otherwise move there for those jobs might be deciding not to.
GARCIA: Yeah, and we can also see how all of these indicators of declining dynamism are related. They affect each other. So for example, if there are barriers to people moving across state lines, then that might stop workers from switching to new jobs in other states. And if the share of startups has fallen, then there might be fewer good jobs to switch to in the first place.
NUNN: And I think that's a real challenge for studying this and for figuring out what's causing it because these things are all linked in pretty complicated ways. And certainly the policy factors we just talked about, you know, no one of them is necessarily driving these trends, but they may all make small contributions.
RAFIEYAN: And Ryan thinks it's really important that economists and policymakers keep working on this problem of falling dynamism because the benefits of dynamism are not just academic. I mean, these have real-world implications. This translates into higher pay for workers, more innovative companies, better living standards.
GARCIA: Yeah, and dynamism isn't just good for workers and the economy. It's also part of the American narrative. And in the past few decades, that narrative has become just a little bit harder to believe. So reversing the decline in dynamism might also help the country rediscover its identity.
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GARCIA: This episode of THE INDICATOR was not just co-hosted but also produced by Darius Rafieyan. It was fact-checked by Brittany Cronin. Our editor is Paddy Hirsch. And THE INDICATOR is a production of NPR.
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