New Research: Fewer New Firms and Lower Mobility – Warning Signs for the Swedish Economy

Productivity growth in the Swedish economy has slowed since the early 2000s. Fewer new firms are being started, fewer low‑productivity firms are exiting the market, and fewer employees are changing jobs. The most productive firms are often small relative to their potential, indicating that they face growth barriers. This is shown by economists Horng Chern Wong and Anders Åkerman in a new SNS report.

In Swedish Productivity: How Well Are Our Production Resources Used? Horng Chern Wong and Anders Åkerman examine productivity growth in Sweden. In the early 2000s, improved resource allocation — where capital and labor moved from less productive firms to more productive ones — accounted for 2.5 percent of Sweden’s annual productivity growth. By the late 2010s, this figure had fallen to 1.5 percent. At the same time, the share of newly established firms halved, from 7 percent to 3.5 percent.

– The Swedish social model with stable real wage growth and a strong welfare state ultimately rests on a productive business sector. The results we find in our report should concern policymakers, says Horng Chern Wong.

The report shows that the most productive firms are not much larger in terms of employment than less productive firms, indicating that they face growth barriers in terms of regulations, taxes, market power or uncertainty. The results also show that fast‑growing firms, so‑called “gazelles”, have become less common. Over the period studied, they have declined by one quarter (from 4 to 3 percent).

– Put simply, Sweden’s best firms are too small, and they appear to find it harder to grow than in the 1990s. This affects all of us as citizens and consumers in a negative way through lower wage growth, higher prices and fewer product choices, says Anders Åkerman.

In the report, the researchers examine how much productivity could increase if all barriers preventing capital and labor from moving to the most productive firms were removed. The theoretical potential for the entire economy is a productivity increase of 30–60 percent. The researchers therefore urge political decision‑makers to review growth‑inhibiting regulations.

– There are regulations that sometimes reduce productivity but nevertheless provide significant social benefits, such as labor and environmental protections. The central political challenge is to identify regulations that unintentionally hold back high‑performing firms without delivering corresponding societal benefits, Anders Åkerman concludes.

Key facts from the report:

• The contribution of improved resource allocation to Sweden’s productivity growth has declined over time — from around 2.5 percentage points per year in the early 2000s to approximately 1.5 percentage points in the late 2010s.
• The share of new firms has fallen from around 7 percent in the early 2000s to 3.5 percent in the late 2010s, and the share of firms exiting the market has also declined.
• Fast‑growing firms, so‑called “gazelles”, have declined from 4 percent in 1997 to 3 percent in 2021.
• The potential productivity gains from removing distortions are estimated at a total of 30–60 percent, with particularly large gains in manufacturing and knowledge‑intensive services.

Main conclusions of the report:

• Ensure better conditions for fast‑growing firms by reviewing regulations that unintentionally hamper expansion.
• Strengthen competition in markets where dominant actors have gained market power.
• Facilitate housing mobility and skills inflows, particularly to Stockholm.
• Increase labor market mobility through reforms that reduce frictions without undermining security.

About the authors

Horng Chern Wong is a researcher in economics at Stockholm University

Contact: horng-chern.wong@su.se

Anders Åkerman is Professor of Economics at Stockholm University

Contact: anders.akerman@su.se