Working Paper: NBER ID: w25382
Authors: Hugo Hopenhayn; Julian Neira; Rish Singhania
Abstract: The US economy has undergone a number of puzzling changes in recent decades. Large firms now account for a greater share of economic activity, new firms are being created at a slower rate, and workers are getting paid a smaller share of GDP. This paper shows that changes in population growth provide a unified quantitative explanation for these long-term changes. The mechanism goes through firm entry rates. A decrease in population growth lowers firm entry rates, shifting the firm-age distribution towards older firms. Heterogeneity across firm age groups combined with an aging firm distribution replicates the observed trends. Micro data show that an aging firm distribution fully explains i) the concentration of employment in large firms, ii) and trends in average firm size and exit rates, key determinants of the firm entry rate. An aging firm distribution also explains the decline in labor’s share of GDP. In our model, older firms have lower labor shares because of lower overhead labor to employment ratios. Consistent with our mechanism, we find that the ratio of nonproduction workers to total employment has declined in the US.
Keywords: population growth; firm demographics; economic concentration; entrepreneurship; labor share
JEL Codes: E13; E20; J11; L16; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Population growth decreases (J11) | Firm entry rates decrease (L11) |
| Firm entry rates decrease (L11) | Age distribution shifts toward older firms (L26) |
| Age distribution shifts toward older firms (L26) | Increased concentration of employment in large firms (L25) |
| Aging firm distribution (D39) | Lower labor shares due to lower overhead labor ratios (J39) |
| Lower labor shares due to lower overhead labor ratios (J39) | Decline in aggregate labor share (E25) |
| Changes in labor force growth (J21) | Changes in firm demographics (J29) |
| Changes in firm demographics (J29) | Changes in average firm size and exit rates (L25) |
| Increase in labor force growth in earlier decades (J21) | Amplified subsequent declines in firm entry rates (L26) |