Business Dynamism and the Gig Economy

For the past few years, the economics and policy literature has been full of stories bemoaning declining dynamism in the US economy. As recent studies have shown, the number of new firm starts is down, their survival rates are shorter, and their contributions to new job growth are lower.  All of these findings come from excellent research using data on employer businesses, i.e. business establishments with at least one employee.  This is a sizable data set, accounting for about 6 million establishments.  Yet, this focus misses an important submerged part of the iceberg, i.e. America’s 22 million sole proprietorships.  These 22 million establishments have only one employee—the owner or sole proprietor.  Self-employment ventures have typically been under-represented in the research literature, and in economic development circles, where it’s often argued that they have little impact on local economies.  However, as the gig economy becomes more important, we’re going to have to change this outdated way of thinking.

An interesting new research paper from economists at the University of Toronto and Texas A&M helps advance this cause.   Pedro Bento and Diego Restuccia opted to look at recent business dynamism trends in a manner that included all types of establishments—employer businesses and non-employer businesses.  Their paper, “The Role of Nonemployers in Business Dynamism and Aggregate Productivity,” finds that the number of non-employer firms has grown rapidly while the number of firms with employees has stagnated.  This shift in  business patterns also has effects on economic productivity, and these growing non-employer firms have contributed up to ¼ of aggregate productivity growth (roughly .26% of overall 1% productivity growth since the 1980s).  This preliminary research suggests some interesting avenues for future research, which are well covered by the authors.  For practitioners, it suggests that we need to pay closer attention to these non-employer businesses, recognizing their growing economic importance and their important potential contributions to improved economic competitiveness as well.

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