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American companies are getting older, not better

Studies show older businesses result in lower growth and greater inequality

February 18, 2015 2:00AM ET

American companies are getting older. That’s not good for economic growth, inequality, jobs or wages.

Research suggests that rather than creating a dynamic economy in which entrepreneurs start new companies to sell better widgets and smarter services, current government rules are protecting existing firms and depressing wages, inducing the economic equivalent of heart disease and arterial sclerosis.

Decades of glib talk idolizing business founders have shaped popular understanding. We have become accustomed to idea of America as a nation where entrepreneurs boldly start businesses, whose growth and profitability drive the economy. 

The reality, various studies show, is that rather than being young and vibrant, American business is aging as subtle barriers discourage upstart competitors and as workers lose the power to bargain for more pay.

Small business mythology

The mantra of small business as America’s engine for economic growth and jobs largely took off after engineer-turned-economist David Birch, then at the Massachusetts Institute of Technology, wrote “The Job Generation Process” in 1979. His pioneering work showed that small companies were responsible for most new jobs.

However, as new evidence emerged, he revised his theory. He showed that job growth did not come from small businesses or new businesses generally. Instead he showed that job growth was concentrated in a relative handful of fast-growing firms in a variety of industries, some of which had been around for years before they suddenly took off. He called them “the gazelles.” Think FedEx, Starbucks and Home Depot.

But the original simplistic idea from 1979 remained popular with both small business advocates and politicians eager to show they care about Main Street. In 1995, President Bill Clinton told a small business conference, “We know that small business is the engine that will drive us into the 21st century … You employ most of the people … and create most of the new jobs.”

Facts show otherwise. In 1987 firms in business 11 years or more employed about 65 percent of workers. By 2013 they employed nearly 80 percent.

This shift is explained by Federal Reserve economists Benjamin Pugsley and Ayşegül Şahin in their recent paper “Grown-Up Business Cycles.”

As we approach the 2016 election cycle, expect a lot of rhetoric about the glories of entrepreneurship but little about government rules that protect older businesses from the rigors of competitive markets.

A “startup deficit” began in the 1980s, the very era when President Ronald Reagan said he wanted to unshackle business from regulations and taxes to foster economic growth. In the early 1980s about 13 percent of businesses were less than a year old. Today only about 8 percent are.

The corollary result, according to Pugsley and Şahin: “In the early 1980s, only around one-third of firms were 11 or more years old (what we call mature firms), while by 2012 almost half of all firms were 11 or more years old.” 

Wage inequality

What are the economic consequences of business aging and the lack of upstarts? We get some answers from two studies by other researchers that show older businesses spell greater wage depression and inequality.

First, a 2001 study by economists Charles Brown of the University of Michigan and James L. Medoff of Harvard challenged the widely held belief that mature businesses pay higher wages. On the contrary, while mature firms offered better fringe benefits and greater job stability, older firms actually paid workers less than newer firms once the experience, education, skill and age of workers were taken into account.

How could the older firms get away with paying less? Risk aversion: Workers who have a stable job with a firm that seems likely to endure are likely willing to tolerate less pay rather than take a gig for better pay at a new firm that may fail.

A second study published last month examined wage inequality in the context of company size. Firms of all sizes pay about the same for jobs requiring no skills or only a modicum of skill, the data showed. But as firms get bigger, they pay more for highly skilled workers, according to Holger M. Mueller of New York University, Elena Simintzi
 of the University of British Columbia and Paige P. Ouimet
 of the University of North Carolina at Chapel Hill.

As firms grow larger, this trend implies increased wage inequality, especially if there are relatively fewer — and therefore smaller — young firms.

The three authors note that “part of what may be perceived as a global trend toward more wage inequality may be driven by an increase in employment by the largest firms in the economy.”

High-skill workers can typically command more pay because of competition for their abilities. But that power can be undercut in several ways. One is through collusion to restrict hiring of skilled workers. Adobe Systems, Apple, Google and Intel agreed last month to pay $415 million for secretly conspiring to hold down compensation by not poaching one another’s workers. In settling, the firms denied they did anything wrong and promised not to do what they did again. That settlement was cheap, about $6,500 for each of the 64,000 affected workers.

Big firms can also use their political clout to get favorable government rules, such as the H-1B work visas that high-tech firms use to bring in lower-paid engineers from India and other countries. That expands the supply of labor, making it harder for domestic workers to earn more.

As we approach the 2016 election cycle, expect a lot of rhetoric about the glories of small businesses and entrepreneurship but little about government rules that protect older businesses from the rigors of competitive markets driven by new entrants.

Instead, Americans need a substantive debate about how to tear down barriers that insulate existing firms from competition, so we get a boom in new enterprises and how to raise wages for all workers, not just those with the most skills.  

U.S. businesses are getting older

This chart compares the share of all businesses that are less than a year old with the share of all businesses in operation for 11 years or more. While startups have declined, mature firms have increased their share of all firms by more than half.

Source: Federal Reserve Bank of New York.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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