The Corner

More Evidence of Our Weird Recovery

Over at Marginal Revolution, Tyler Cowen posted this interview of economist John Haltiwanger, an amazing labor economist who, along with his co-authors Steven J. Davis  and Scott Schuh, has fundamentally altered our view of the labor market. Their book, Job Creation and Destruction, was groundbreaking and showed that not only is there plenty of movement within the labor market, but that a good fraction of this flow is due to jobs, rather than workers themselves, moving. Their findings, obviously, had important policy implications, especially since they were challenging many of the common beliefs about the labor market.

In the interview, Haltiwanger talks about the book and then goes into some of his new research, which, among other things, highlights how today’s recovery is different from previous ones. He explains that, for instance, consistent with previous recessions, “recruiting intensity” dropped substantially during the great recession. But now, the data show that it has been unusually slow to recover. Further, as the economy went on to recover and job vacancies started to come back, hiring didn’t. ”The unemployment rate has been higher relative to the number of vacancies than would be predicted by historical trends,” he explains. The question now is whether or not this change in our index of recruiting intensity is permanent or just temporary.

Along these lines, Haltiwanger has also written a lot about the decline in the rates of job creation and destruction since the 1990s. As he explains, we have seen a decline in the rate of workers entering the market, and a pretty stark decline in new businesses as a share of the economy. We should probably care about this, he argues, since we have gotten a lot of productivity growth and jobs in the past from new entrants, with some of them doing extremely well in terms of productivity and employment and some of them failing just as fast. When this fluid dynamic slows down, so does productivity growth and jobs. (The whole thing is worth reading here.)

I don’t know Haltiwanger, but I was lucky enough to be at AEI when Steven Davies was a visiting scholar there. One day during a lunch, I was telling him about a paper I was writing on the Small Business Administration. That’s when he told me that the idea that small businesses are the engine of growth, the main belief behind the existence of the SBA and many other pro- small business policies, is not grounded in reality. We talked some more, I read his book with Haltiwanger, and ended up writing this paper on the issue (you can read a shorter piece on the issue I wrote for Forbes back in 2006). I can say that, without that conversation with Davies, I would still believe in one of the biggest American myths out there. As it turns out, young firms, rather than small firms, are the engine of growth. (Which doesn’t really mean it’s time for a Young Business Administration, either.)




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