America Must Rediscover Its Dynamism

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The US experienced a dramatic slowdown in productivity growth: between 1947 and 2005, labor productivity grew at an average annual rate of 2.3 percent; after 2005, the rate fell to 1.3 percent.
If output per hour had continued to grow at 2.3 percent between 2005 and 2018, the US would have produced $11 trillion more in goods and services than it did, according to the US Bureau of Labor Statistics.
Slower productivity growth in the US is part of a broader pattern across advanced economies and threatens to lower growth prospects globally, with adverse consequences for poverty reduction in developing economies.

Two key measures:
- Labor productivity: real output per hour of work.
- Total factor productivity (TFP): accounts for changes in capital intensity and capacity utilization.
Historical evolution:
- Labor productivity gains slowed from the range of 3–3.5 percent a year in the 1960s and 1970s to about 2 percent in the 1980s.
- Late 1990s and early 2000s: a temporary rebound to 3 percent.
- Since about 2003: lackluster gains; labor productivity slowed to an average growth rate of less than 1.5 percent in the decade after the Great Recession.
TFP closely mirrors labor productivity; falling TFP growth drives the decline in labor productivity gains, while labor productivity typically exceeds TFP growth because of increases in capital intensity.

Declining business dynamism—fewer new firms and larger incumbents—aligns with lower productivity growth through reduced creative destruction and slower reallocation of resources.
Key empirical markers:
- Entry rate (share of enterprises that started operating in a given year) fell from 13 percent in 1980 to 8 percent in 2018 (US Census Bureau).
- Average number of employees per enterprise rose from 20 in 1980 to 24 by 2018.
- Rise in corporate concentration accompanied by higher market power: the average markup by publicly traded US companies surged from about 20 percent in 1980 to 60 percent today.
- Labor’s share of the US economy has fallen by about 5 percentage points since 1980, with larger declines in industries that experienced more concentration.
- Secular decline in business-to-business reallocation since the late 1980s, indicating reduced worker movement from declining to expanding firms.
Mechanism: Less entry reduces competitive pressure on incumbents, enabling higher markups and profit margins, which can depress labor’s share and slow aggregate productivity growth.

Researchers have advanced four broad, non‑mutually exclusive explanations for the decline in creative destruction and productivity:

The advent of information technology and resulting economies of scale
- Advanced IT lowered marginal costs but raised fixed costs, favoring already-productive, large firms that can scale across markets.
- Initial IT-driven productivity boom in the late 1980s and 1990s may have been followed by persistent concentration that discourages entry and reduces overall dynamism.

Changes in the process of knowledge diffusion
- Technological frontier firms may be so advanced that lagging firms cannot adopt frontier technologies.
- Defensive patenting and concentrated patenting by superstar firms can create adoption barriers and explain rising noncompetitive rents and lower dynamism.

Demographics and falling population growth
- US population growth has plunged since the 1960s and reached a historic low in recent years.
- Slowing population growth reduces the rate of new business formation and, thereby, creative destruction and productivity growth.

Policy changes (regulation, R&D incentives, corporate taxes)
- While potential contributors at the industry level (e.g., licensing requirements, R&D subsidies that favor incumbents), recent research suggests such policy changes are unlikely to quantitatively account for the aggregate slowdown, which is observed across many developed economies.

Occam’s razor suggests focusing on global developments (advanced IT and declining population growth) as the most likely drivers of the broad-based slowdown in dynamism and productivity.
Policy levers:
- Demographics: Given limited success of fertility-reversal policies, immigration policy is identified as the main short- to medium-term lever to counter falling population growth and its effects on dynamism.
- Competition policy: If IT-driven scale economies increased concentration and reduced creative destruction, stronger antitrust enforcement and competition policy become central to countering higher markups, slower innovation, and lower growth.
Stakes: Reversing the productivity slowdown is framed as “a trillion-dollar question” for policymakers due to the large cumulative output losses associated with persistent low productivity growth.

Michael Peters, F&D Magazine, September 2024.

America Must Rediscover Its Dynamism
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