America has seen a pervasive drop in the economic dynamism of every one of its states since the early 1990s as new business formation sinks and workers move jobs less frequently, according to new research that underscores the challenge the country faces in restoring its entrepreneurial verve.
Among the least economically vibrant parts of the US are aging, industrial states clustered around the Great Lakes and Northeast, many of which swung in favour of Donald Trump in the last election. Ohio and Michigan were among those where the number of firms shrunk outright from 1992 to 2014, the period studied.
The findings come in a report from the Economic Innovation Group, a research organisation that has been tracking the troubling deterioration in America’s economic vibrancy. The US has seen a long-term decline in business births, less migration between states, and a growth in the economic power of incumbent companies, sounding alarm bells in Congress.
“The entrepreneurial and restless energy that once defined the United States seems to be evaporating as the economy grows more static, top-heavy, and concentrated,” the report found. “The decline of dynamism has been steep, rapid, and pervasive across all states”.
The EIG’s index of dynamism encompasses seven metrics including the annual increase or contraction in the number of firms, the share of a state’s jobs accounted for by recently-launched companies, the amount of churn in its jobs market, and its labour force participation rate.
Nearly a third of states experienced at least a 50 per cent plunge in their dynamism score from 1992 to 2014. Even the country’s most dynamic state – Nevada, which has grown its number of businesses by 79 per cent in just over two decades – now has a dynamism score that would have classified it as a laggard in the early 1990s.
John Lettieri, co-founder of the EIG, said the declines were looking “increasingly structural”, noting the lack of a significant bounce-back since the end of the recession. During the post-recession rebound only seven states bolstered their dynamism, while 17 fell to their all-time lows in 2014.
The report exposes an east-west divide, with all but one of the 10 most dynamic states sitting west of the Mississippi. The exception was Florida, which ranks at number three after Nevada and Utah. It finds that dynamism has become heavily concentrated, with just 10 high-performing states accounting for more than half of the total US-wide increase in the number of firms over the 1992-2014 period.
States that are top-heavy in terms of manufacturing employment have had a particularly hard time boosting their dynamism, highlighting the risks of a reliance on legacy industry. Six out of the 10 least dynamic states are located around the Great Lakes, according to the EIG.
Nevertheless, one of the cornerstones of Mr Trump’s economic policies has been an attempt to convince established manufacturers to divert more investment to domestic production as he sets ambitious targets to bolster GDP growth to 3 per cent.
Steve Glickman, the EIG’s executive director, said states that were outperforming were focussing on attracting young people or immigrants and providing a supportive environment to start up new businesses, rather than trying to lure big companies across state lines.
The presence of a large immigrant population was another “powerful ingredient” in bolstering economic dynamism, the EIG found. Research from the Kauffman Foundation has found that immigrants are twice as likely to become entrepreneurs as native-born Americans.
Among the top performers in the study are states with a higher share of foreign-born workers than the national average, including Nevada, Florida and Texas. In the 10 most dynamic states, nearly 13 per cent of the population was born abroad, compared with 6.7 per cent in the least dynamic quintile. West Virginia, which is the least dynamic, ranks last for immigration with 1.4 per cent of its population born abroad.
This finding comes as President Trump pledges to take a tougher line on immigration, including by promising to build a border wall with Mexico, bearing down on illegal entry and tightening up on refugee admissions.
Among the reforms recommended by the EIG are reducing occupational licenses that stifle labour mobility, cracking down on the use of non-compete clauses in employees’ contracts, and capitalising on the benefits of highly skilled immigration.
“Immigrants are disproportionately entrepreneurial,” Mr Lettieri said. “If you really want to boost dynamism there is low-hanging fruit where we could be acting now.”