NCPA - National Center for Policy Analysis


April 20, 2007

In the past quarter century, the ups and downs of the American economy -- that is, its business cycle volatility -- have decreased.  That's a good thing: it means less severe recessions, milder swings in the unemployment rate, and possibly fewer business failures.  Over the same time period, though, the volatility of employment growth rates and sales growth rates at some 10,000 companies whose securities are traded on various stock markets have risen, on average.

Researchers with the National Bureau of Economic Research studied these apparently contradictory trends.

  • The researchers' main finding is that the employment-weighted mean volatility of firm growth rates for all U.S. businesses has declined by more than 40 percent since 1982.
  • Longitudinal Business Database data confirm that volatility rose among publicly traded firms, however, this trend is overwhelmed by declining volatility among privately held firms, some large, but many as small as mom-and-pop shops.
  • Although the level of business volatility is relatively high at privately held firms, it has trended downward. In contrast, the level of business volatility is relatively low at publicly traded firms, but it has trended upward.
  • This pattern of "volatility convergence" holds in every major industry.

Several developments underlie the volatility convergence phenomenon:

  • Activity has shifted to older employers among privately held businesses, and older businesses tend to be much more stable than new businesses.
  • The employment-weighted rate of business entry and exit has also declined.
  • The shift of employment toward older businesses accounts for 27 percent of the volatility decline among privately held firms.
  • Large publicly traded companies have gradually displaced smaller businesses in some industries.

Source: David R. Francis, "Changing Business Volatility," NBER Digest, April 2007; based upon: Steven J. Davis et al., "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately," National Bureau of Economic Research, Working Paper No. 12354, July 2006.

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