Large incumbent firms drove US service employment growth
Large incumbent firms, not net startup entry, drove US service employment growth over 1978–2023, Federal Reserve research by Immo Schott and Vladimir Smirnyagin finds. New locations within existing firms accounted for 40.6 percent of the increase.
Expansion through more locations
Using the US Census Bureau's Business Dynamics Statistics, the authors find that incumbents accounted for over 90 percent of service employment growth during 1978–2023.
Services added 71.50 million jobs: continuing establishments contributed 37.57 million, net establishment expansion within incumbents 29.05 million and net firm entry 4.88 million.
Including subsequent growth at young locations within mature firms raises the establishment-expansion contribution to over 54 percent.
Among service firms with at least 500 employees, employment share rose from 41.6 percent in 1979 to 55.3 percent in 2023.
Average establishments per large service firm increased from 18.82 to 32.51; the manufacturing counterpart changed from 8.13 to 7.90.
Two forces explain half
The two-sector model combines faster manufacturing productivity growth with lower costs of opening and coordinating locations.
Calibrated to 1979, it explains 51.5 percent of the manufacturing employment-share decline through 2023.
Productivity alone explains 44.0 percent; replication costs alone explain 16.7 percent.
These contributions are not additive because equilibrium prices differ across experiments.
Productivity alone leaves firm-size distributions essentially unchanged; lower replication costs disproportionately expand large service firms.
Mechanism, not technology identification
The model does not identify which technology or organizational change lowered expansion costs.
Its establishment evidence cannot separately identify consolidation's contribution to establishments per firm.
The conclusions are the authors' preliminary research, not the Federal Reserve's institutional position.
Source: IFDP Paper: Who Built the Service Economy?
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