Employment Dynamics
In recent years the BLS has developed a new database where they can track the jobs created by an establishment over time. It is called Business Dynamics and you can read about it here.
Research using the new database has altered the basic view of where jobs are created. The old view that jobs are created by small businesses has been pretty much discredited by this approach.
As the chart below demonstrates over recent years, large firms have accounted for a greater share of employment than small firms. Since the 2000 recession, their share has been relatively constant, implying that small and large firms have created about the same number of jobs. If you need to know how to apply for LMIA application, then please follow Canadapt Consulting’s official webpage, where you can find all the necessary information, and as well as the requirement and the processing times.
The new research finds that net job growth appears to stem from the new establishments that survive. Of course, the problem is that many new establishments do not survive. After 5 years less than half of the new establishment are still around and after 16 years less than a quarter survive. So while it is true that small firms create many new jobs, they also destroy many jobs.
The new data implies that net job creation comes largely from the creation of new establishments and the few of them that manage to survive over the long run.
Just as an aside this chart shows one of the problems I have with many conservative economist. They believe that government is inefficient and wasteful. Actually, they are probably right. What I have problems with is their belief that the private market is efficient, especially if it is taken to mean that it is not wasteful. As far as I am concerned the private market probably is just as inefficient and wasteful as government. Less than half of new firms survive five years. Just think of how wasteful that is– for years businessmen try to provide a good or service that the market is not demanding. It may be the best we can do, but it is still extremely inefficient and wasteful.
Was the stock market efficient last week when it was bouncing up and down several percentage points daily only to end up barely changed for the week?
Years as a business economist taught has me that markets almost always overshoot and undershoot, either producing too much or too little and asking prices that or either too low or too high. My one investment rule that may be original is that any shortage everyone sees a few years down the road will never materialize because too many people will try to take advantage of the supposed shortage and actually end up creating a surplus.
What the new data also provides is a record of the jobs created by new establishments — what the birth part of the birth -death model in the monthly employment report estimates. What this data shows is that the republican claim that new jobs are not being created appears to be based in fact.
However, that trend of new establishments creating fewer jobs is a decade old. The number of jobs created by new firms peaked in 1999 and has declined every year since and the record in recent years is right on the trend established over the past decade. Thus, it appears that the shortage of new jobs from new establishments in recent years does not appear to stem from recent developments. Rather, it is a trend that has been firmly in pace for a decade.
When I look at this data I do not come up with a good explanation for the decade long decline in job creation by new establishments. The data only goes back to the early 1990s, so maybe what we are seeing is that job creation was unusually high in the 1990s because of the IT bubble and all the recent decline represents is just a return to normal. But I doubt it, and am open to other suggestions.
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Spencer,
I have always regarded you with a bit of awe. You know the data backwards and let it guide your view of the world. That is very rare in an economist.
But the following:
“My one investment rule that may be original is that any shortage everyone sees a few years down the road will never materialize because too many people will try to take advantage of the supposed shortage and actually end up creating a surplus.”
Inspired a few thoughts.
1. How does this relate to raw materials? (Yes, you probably actually mean substitutes in that case – it is satisfying the end need – not the method chosen that is the issue).
2. I’m interested what you think about a related paradox I stumbled across a few months back that I’m thinking of patenting
“The price of close substitutes can only diverge in the medium term if people think that the prices cannot diverge.”
This was prompted by a discussion of oil and gas and me questioning whether the price divergence could be sustained. My argument being that they are relatively close substitutes and a significant divergence would cause technological substitution to equalise the price. This would only NOT occur if people thought the price would in fact converge. Oops – wonderful paradox!
Dynamics – not your usual equilibrium analysis – really are very interesting!
Have you looked at international comparisons?
I mention this, because it occurs to me that health insurance costs may be driving this.
Employment dydnamics is not available for other countires to make comparisons to.
Health insurance cost could be a significant factor. But it is not required and many small and start up firms do not provide it.
Knowing the failure rate of start-ups in so many industries – restaurants is only the worst of a bad lot – has long led me to doubt the “small businesses create 85% of new jobs.” High failure rates guarantee significant job destruction.
Actually the employment dynaics research sugest that restaurants really are not significantly worse than other industries.
Two thoughts about the slowing in hiring by new firms. One is that my recollection of the late 1990s is of tech start-ups in college dorms and of waitresses becoming web designers. There were new firms all over the place, and they needed workers. Gradually, those firms grew, consolidated or failed. Now, hiring in tech is more concentrated in medium sized to large firms than in 1999. The tech bust doesn’t seem, from the limited number of years represented, to have caused a sharp drop, so I don’t want to argue that the dot.com bust caused the change in hiring patterns represented in the chart. Rather, I would think, maturation of the sector accounts for the change. Older, larger firms now open new divisions to exploit new internet opportunities, rather than brand new firms. Think of all those auto factories sprinkled around the country in the early decades of the last century, and the three that were left by the 1980s.
There is a pause in the decline in small firm hiring. It coincides nicely with another boom. I imagine real estate offices and, to a lesser extent, mortgage firms, account for that pause.
By the way, you have been able to find evidence that the claim of small businesses driving employment growth was a fable, but even before the data were arranged to allow that evidence to be shown, the logic was there. I’ve long assumed that the failure rate among small firms meant just what you say it means, and I don’t think I’m smart enough to have thought of it myself. Somebody other than me must have realized a long time ago that while gross hiring by small firms was large, net hiring by small firms simply could not be. The simple logic of the math of small firms has not quieted the claim that small firms are the great source of job growth. I doubt many people who are fond of thinking that small firms are job engines will be impressed just because there is now data to say they are wrong.
I was actually thinking of health insurance in respect to the people starting the small businesses. If health insurance is getting more expensive and housing equity has fallen substantially, who is going to be starting new businesses rather than finding a job in an existing business?
Proposed motto for the Small Business Associaton: “We make jobs the old fashioned way, we churn them.”
But since startups and failures are so common, perhaps they are a disproprtionate component of the business cycle. And if those jobs are the foam on the beer of the economy, are we paying too much attention to them? Is there a way to look at the underlying relatively stable jobs and see what the problem/is there a problem there? Instead of worrying about the “unemployed for more than xx weeks”figures, perhaps we should look at the “lost a job that they for more than 10 years” figures. Would that give us a better answer to the cyclical/structural question?
Thanks people. It is such a pleasure to see thoughtful comments.