6 - Entrepreneurship and Job Growth

Summary

Introduction and Overview

Healthy market economies are dynamic, with a high pace of churning of jobs, workers and firms. In a healthy economy like that of the United States, this churning, through entrepreneurship, is productivity-enhancing with outputs and inputs being reallocated from less productive to more productive businesses on an ongoing basis. Moreover, in a closely related manner, in following entering cohorts of businesses in the United States, the market selection dynamics are productivity-enhancing. Entering cohorts in the United States have a larger than average dispersion of productivity, but this dispersion is reduced as the cohort ages and the less productive firms exit. These patterns reflect market experimentation of new entrants, and the subsequent learning and selection dynamics for young businesses plays an important role in U.S. economic growth. Put differently, these patterns suggest entrepreneurial dynamics are critical for understanding U.S. economic growth. With “entrepreneurs” and “young businesses” treated synonymously in what follows, it is important to note that this is consistent with Schumpeter's view that entrepreneurs need new firms to exploit their ideas, as noted in Chapter 1.

The evidence for the dynamism of market economies in general and in the United States in particular has been greatly enhanced by the development of longitudinal business databases as well as longitudinal employer-employee matched data. Early evidence on this dynamism for the United States and other countries was often confined to the manufacturing sector, but increasingly now there are longitudinal business data covering the private, nonfarm business sector.