Fatih Karahan, Federal Reserve Bank of New York

Demographic Origins of the Startup Deficit

Abstract

We propose a simple explanation for the long-run decline in the U.S. startup rate. It originates from a slowdown in labor supply growth since the late 1970s, largely pre-determined by demographics. This channel can explain roughly 60% of the decline and why incumbent firm survival and average growth over the lifecycle have changed little. We show these results in a standard model of firm dynamics and test the mechanism using cross-state variation in labor supply growth. Finally, we show that a longer entry rate series imputed using historical establishment tabulations rises over the 1960-70s period of accelerating labor force growth.

Fatih Karahan joined the Federal Reserve Bank of New York in July 2012 as an Economist in the Microeconomic Studies Function. His primary research interests include macroeconomics of the labor market and housing market. His current research focuses on the role of geographical mismatch on unemployment during the Great Recession, the persistence of earnings shocks over the life cycle, and the effect of the returns to skills on the college premium. Mr. Karahan received his Ph.D. from the University of Pennsylvania in May 2012.

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