The role of startups for local labor markets

Summary There are substantial differences in startup activity across US local labor markets. We study the causes and consequences of these differences. Startup productivity shocks are found to drive much of these cross‐city differences in startup activity. Examples of such shocks include breakthroughs in biotech that spurred startup formation in San Diego and Philadelphia. Overall, these shocks explain half of the forecast error variance of startup job creation, accounting for 40% of population growth and long‐run changes in employment. Shocks to barriers to firm entry have economy‐wide effects similar to those of startup productivity shocks but operate largely through the number of startups, rather than their size. We use a novel spatial panel vector autoregression, identifying shocks using shift–share external instruments.