Interview with Ayşegül Şahin: Quits and Start-ups

David A. Price has an interview with “Ayşegül Şahin: On age growth, labor’s share of income, and the gender unemployment gap” (Econ Focus: Federal Reserve Bank of Richmond, Second/Third Quarter 2021, pp. 18-22).

I had not known, for example, that Şahin had completed the coursework for a doctorate in electrical and electronics engineering when she first encountered economics, and decided instead to change over and pursue a different PhD. Here are two of the comments that caught my eye, but there’s much more in the interview itself:

Differences in the labor market recovery after the Great Recession and the pandemic recession

What was striking about the Great Recession was its persistence. Everybody kept saying at the time that inflation is around the corner, the labor market is getting tighter, but it took a very long time for the labor market to heal. We are not seeing that this time. This was a very different shock. It was sharp, but it was transitory compared to the Great Recession. So the effect was great, but the recovery has been faster as well. I think that’s the main difference. Another big difference is that the Great Recession was a big shock to the construction sector, and we are seeing the opposite now. We’ve been spending more time at our houses and people want to improve their houses and they want bigger houses. …

But the biggest difference is persistence. After the Great Recession, it took quits rates five or six years to recover. Today, the quits rate is already back to where it started from before the pandemic hit … The quits rate is the number of quits during the entire month as a share of total employment. The quit rate was in Janet Yellen’s dashboard when she was the chair, actually, so lots of people started paying attention to it. … But when there’s a recession, quits go down because people become more risk averse. They don’t want to risk unemployment. So if you don’t like your boss or you don’t like your career, you just say, “OK, I’d better wait a little bit more.” During the Great Recession, this aversion to quitting lasted for a long time. As a result, people were stuck in jobs that they were not necessarily happy about or they were not very productive at. But in this recession, quits rates bounced back quickly. One reason is because there are a lot of job openings; the second is that people want to go back and find jobs that they are better matched at.

The Long-Term Decline in US Start-up Rates

Startups are important for various reasons. First of all, they are important areas of job creation and productivity growth. I have worked on this in the last five or six years, and what we have found is that the declining startup rate is a consequence of the declining growth rate of the labor force in the U.S. economy. … With the declining labor force growth rate, we also started seeing a decline in the startup rate. You can think of the startup rate as the birth rate of firms.

What happens when the birth rate goes into decline is that the population gets older after a while. The same thing has happened with U.S. firms. What does it mean when more firms are older? Older firms are more stable, but they are also slower. They create fewer jobs, which accounts for part of the decline in job creation. An economy like this is more stable — the unemployment rate tends to be lower — but it also has lower productivity growth. That accounts for a lot of trends we have been seeing in the U.S. economy. … [W]hen you look at different sectors and different locations, as we did — we looked at around 10,000 labor markets — you see a decline in startups in more than 90 percent of them. The point that we are making is that there seems to be a common factor affecting almost all the markets in the U.S. economy. …

[I]f you look at the startup rate of the manufacturing sector in 1980, you could have already predicted that this sector’s employment was going to decline over time. That’s because its employment share was way higher than its startup employment share. The entry or lack of entry of startups into a sector gives you information about its condition before you see existing firms exiting the sector. The startup activity that is happening now is another sign of reallocation. Where the startups are entering will be informative in terms of where the economy is going in the near future.