Negative Labor Market Trends Accelerated in the 2000s

April 07, 2016
startup deficit

Today’s post is the second in a two-part series examining long-term trends in the U.S. labor market.

Tuesday’s post covered how some negative labor market trends started long before the Great Recession. This post examines how they accelerated after 2000.

Juan Sanchez, a research officer and economist with the St. Louis Fed, and Marianna Kudlyak, an economist with the Richmond Fed, examined trends such as declining job reallocation,1 the job ladder collapse,2 job polarization3 and the startup deficit.4 They noted that these trends started at the beginning of the 1980s and accelerated after 2000, which coincides with the decline in aggregate labor force participation. They wrote: “In fact, male labor force participation has been declining for decades. Women’s labor force participation rose until 2000, after which it started to fall.”

Trends in Startups

Specifically related to the startup deficit, Sanchez and Kudlyak noted that the startups most closely associated with employment growth had been growing prior to 2000 but declined afterward. They cited research showing both good and bad news about startup trends:5

  • The good news is that there has been a shift in the retail sector since the 1980s from small “Mom and Pop” startups (which provide fewer jobs) to branches of large, stable national chains (which provide more jobs).
  • The bad news is that high-tech startups, critical for innovation and productivity growth, were rising before 2000 but have been sharply declining ever since.

Regarding startups, Sanchez and Kudlyak said that more research was needed to understand whether the results on the startup deficit reflect changes in the dynamics of employment growth relative to other explanations. They also said research was needed to determine if the deficit was due to technology shifts giving larger incumbent firms an advantage relative to entrants or if it was due to distortions affecting the efficient allocation of workers to firms (such as regulations affecting worker mobility and increasing the costs of starting a business).


Sanchez and Kudlyak concluded that determining whether labor market developments are the result of cyclical phenomena or long-term trends could be helpful for policy. These negative trends might lower labor productivity and, in turn, wages and labor force participation. They wrote: “Are these trends likely to be reversed with more expansionary monetary policy? To answer that, we need to understand the underlying forces behind the decline in business dynamism: Maybe it’s an optimal response to new technological shocks, or maybe the decline is due to some bad regulatory changes.”

Notes and References

1 Job creation plus job destruction.

2 In this case, they focused on the aspect of the ladder that large employers poach workers from smaller employers during advanced stages of a recovery.

3 Middle-skill occupations are disappearing, while low- and high-skill occupations are growing.

4 The dramatic decline in the creation of firms.

5 Decker, Ryan; Haltiwanger, John; Jarmin, Ron; and Miranda, Javier. "The Role of Entrepreneurship in U.S. Job Creation and Economic Dynamism." The Journal of Economic Perspectives, 2014, Vol. 28, No. 3, pp. 3-24.

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