Browse by Tags

We find that a lot of the talk about small businesses as job creators in the U.S.--especially during political campaigns--isn't quite backed up by the data. The same may be true elsewhere. Atlanta Fed President Dennis Lockhart was in Spain to speak with students at the Instituto de Empresas . The focus of his speech was on growth and jobs, and he spent some time tamping down heightened expectations for smaller faster younger firms--or "gazellas"--to drive growth in the U.S. or Europe: We found that the role of young firms in job creation is easily overstated. For instance, the claim is often made that new firms alone account for all net job creation. This is true in what you might call an accounting sense. That is, the number of jobs created by new firms about matches or exceeds the net number of jobs created by all firms. But this fact ignores the reality that established firms that are growing create many more jobs each year than do new firms. It's just that established firms that are downsizing are responsible for destroying a lot of jobs as well. New firms haven't been around long enough to downsize. In fact, as a group, young firms between one and five years old destroy more jobs than they create because of the high failure rate. Moreover, we found that many small firms are not established with an objective to grow and add employees. The landscape of small, young businesses is heavily populated with "mom-and-pop" businesses. They play an important social role, but are not a major source of jobs beyond the initial number of employees at establishment. In our investigation we then looked at the argument that it is the relatively small subset of small, young, fast-growing firms—the gazelles—that drive job creation. It's clear that gazelles do contribute significantly, but it's the growth dimension, not the age or size dimension, that matters most. That is to say, fast-growing mature firms also account for a lot of job creation. And heavy emphasis on technology and bioscience industries—so popular among economic development professionals—may also be misplaced. High-growth firms emerge in a number of industries, some decidedly low tech. All in all, it's not so obvious that the likely source of high-growth firms can be identified. The recent recession significantly constrained the growth opportunities of companies. By one definition of fast growth, there are about a third fewer fast-growing firms in the U.S. economy now compared to the mid-2000s, and they are adding about half as many jobs compared to the earlier rate. It may seem like an obvious point, but one still worth emphasizing. Innovation and entrepreneurial activity are most likely to achieve maximum impact in terms of job creation in a context of general economic growth. Read the full speech here .

In 1962, Arthur Okun wrote that "changes in the level of economic activity are associated with shifts in the composition of employment and output by industry." But the nature of the economic recovery in the U.S. (as slow as it may seem) has made reconsidering Okun's Law popular (if not necessary). In a post for VoxEU , Laurence Ball , Daniel Leigh , and Prakash Loungani examine whether jobs and output can now be decoupled: Figure 1 shows peak-to-trough declines in output for a group of OECD countries during the Great Recession against the change in unemployment over the same period. The correlation is essentially zero. In the language of economics textbooks, Figure 1 suggests a breakdown of Okun’s Law, the short-run negative relationship between output and unemployment reported by Arthur Okun in 1962. Figure 1. The Great Recession: Peak-to-trough output and unemployment changes (simple scatter plot) We believe the casual impression that "Okun’s broken" is misleading (Ball, Leigh and Loungani 2013). Two adjustments are needed to restore Okun’s Law (as shown in Figure 2): The first adjustment is to account for differences in the duration of the recessions; For the set of recessions shown in these charts, the period from peak to trough ranges from two quarters to seven quarters. As we show in our paper, Okun’s Law implies a relationship between the changes in unemployment and output only if we control for this factor. The second adjustment accounts for the fact that, historically, the coefficient in Okun’s Law varies across countries. Figure 2. The Great Recession: Peak-to-trough output and unemployment changes (with adjustments for duration of recessions and country-specific Okun coefficients) Read the full post here .

According to a new study from the Kauffman Foundation , new businesses are showing "signs of recovery" in worker turnover. It stands to reason, as the report shows, that startups have a greater percentage of new hires, but the finding that worker churn rates seem to be recovering only at young firms is telling, and may suggest, as the report points out, a slackening in economic dynamism. From the report: Figure 1 shows the rates of job creation and destruction by broad firm age groups from 1998:2 to 2011:1 for a selection of twenty-eight states. These twenty-eight states account for 56 percent of total U.S. nonfarm employment in the second quarter of 1998, according to the BLS’s Current Employment Statistics. Fluctuating around 20 percent, job creation rates for the youngest businesses—those that are zero to one year old—are much higher than for more mature businesses.14 Job creation rates for the youngest firms are twice those in the firm age range of two to ten years and four times as large as the rates for mature businesses (eleven-plus years old). Though less dramatic than the differences in job creation rates, job destruction rates also are higher for the youngest businesses than for more mature businesses. In comparing the job creation and destruction rates across firm age groups illustrated in Figure 1, it is evident that young firms have the largest net job creation rate (the difference between job creation and destruction). For the youngest firms, the net job creation rate in booms exceeds 10 percent and, even in the recent recession, exceeded 6 percent. In contrast, the net job creation rates for more mature businesses are positive in booms and negative in recessions, with a slightly higher average for businesses between two to ten years old than for those eleven years old or older. The finding that the highest net job creation rates are from young firms is consistent with the evidence in Haltiwanger, Jarmin, and Miranda (2010) from the BDS. Job creation rates are procyclical, that is, they rise during economic expansions for all firm age groups, while job destruction rates are countercyclical. Though these patterns are not surprising, the cyclical patterns differ sharply across the 2001 and 2007/09 recessions. While there was a notable increase in the job destruction rate for young businesses in the 2001 recession, the job creation rate for these businesses did not change much. In contrast, the 2007/09 recession exhibited a more pronounced decline in job creation for the youngest businesses, along with an accompanying increase in job destruction. The implication is that the 2007/09 recession hit the youngest businesses much harder than the 2001 recession did. Though the youngest businesses were hit hard in the 2007/09 recession, they are the group that has had the most robust recovery, with their job creation rate growing from 0.18 to 0.23 between 2009 and 2011. Read Job Creation, Worker Churning, and Wages at Young Businesses here .

GOOD and MTV are teaming up to produce some useful infographics aimed at younger voters. The latest is on jobs, and it puts together a lot of top-line information. Like where new jobs are being created most rapidly: And the increasing importance of education: Does the inforgraphic provide more data and context than an economic paper? No. But it does as well as many short articles out today--if not better. And if it allows for visual learners to pick up a better understanding of the issues, then we're all for it. Take a look here .

The Partnership for a New American Economy wants us to take a close look at how the U.S. may be falling behind in the recruitment of top talent from around the globe. The Partnership is a the coalition of big names in business and city government,business leaders, like Michael Bloomberg, Steven Ballmer, and Rupert Murdoch. And its recently released report is a scathing criticism of U.S. immigration policy. There is a lot in the report to discuss, but we found the Partnership's call to change policy to encourage more entrepreneurs to set up shop in the U.S. to be particularly provocative. According to the report, the U.S. provides relatively little incentive--or perhaps only disincentive, when put into a global context--for people with new business ideas to come to the U.S. From the report: Innovative programs are emerging to incentivize new groups of highly educated workers to leave their home countries and start companies that attract capital and boost domestic job creation. Chile, the United Kingdom, and Canada have all launched programs targeted at entrepreneurs and investors. Start- Up Chile, for example, offers im- migrants $40,000 in equity-free capital and a one-year visa to start a company on Chilean soil. So far, the program has drawn more than 1,600 applications from 70 countries, with applicants based in the US leading the way. More than 200 foreign start-ups are now up and running thanks to the program, raising $8 million in seed funding from firms in France, Brazil, Argentina, Uruguay, and America.67 Recent developments in the UK show the real push many countries are making to attract the entrepreneurial immigrants so helpful in job creation. In 2008 the UK created a special entrepreneurship visa that allowed founders of companies with £200,000 of investment (about $320,000) to settle in the country for three years. In 2011, however, the UK decided to compete for such high-value immigrants by opening its doors to the most promising, non-EU entrepreneurs still further. Today, the government al- lows some high-potential entrepreneurs funded by venture capital firms, angel investors, or seed groups to come into the country with just £50,000 in funding (about $80,000). Start-up founders who create 10 jobs within three years - or generate £5 million in revenues (about $8 million) - are also put on a more rapid track to gain permanent residency. Such changes are having an impact. In the first year under the revised rules, Paul Barrett, the Economic Migration Policy Advisor for the UK's Immigration and Border Policy Directorate, says applications for the country's entrepreneurship visa program more than doubled. At the same time, the country also created a way for potential entrepreneurs to visit the country to explore starting a business: Such immigrants can now get special six-month prospective entrepreneur visas. "We didn't want to get left behind," Bar- rett said of the motivation be- hind recent initiatives "There's a lot of competition out there now for global talent." Like many countries focused on economic growth, high-talent immigrants - including entrepreneurs and investors - are deemed critical to the country's future success. As Barrett explains it, "Attracting high- skilled immigrants, investors and entrepreneurs - those who will truly grow our economy - that's where the thrust of our recent policies have been." Download the full report here .

There seems to be fairly wide agreement that we have been witnessing a jobless recovery in the U.S. So it comes as a bit of a surprise to learn, as Menzie Chinn points out at Econbrowser , that private employment growth is outpacing GDP. Chinn shows the growth rate of private employment against GDP in this figure: Chinn: Notice that from 2008Q4 onward, employment growth was below the regression line (i.e., employment was underpredicted), and continued on into the recovery period. The most recent observations have indeed been above the regression line. But there does seem to be a consistent pattern wherein contractions are associated with employment growth below that implied by the relationship that obtains over both upswings and downswings. This suggests to me that we don’t want to look at static relationships (levels on contemporaneous levels, or growth rates on contemporaneous growth rates), but rather dynamic ones. And perhaps ones that allow for different behavior in contractions (after all, GDP business cycles are not symmetric – contractions are shorter than expansion). Read Okun’s Law, the Jobless Recovery, and Unexpectedly Fast Net Job Creation here .

There was a rise in optimism among small business owners in November, according to a National Federation of Independent Business survey. The NFIB's optimism index rose to 92.1, from 90.2 in October, spurred largely by perceptions among small business owners that labor conditions are improving. Here's a look at the long term trend: While the uptick is certainly a nice change from the end of the summer, when the index was down at 88.1, NFIB economists William Dunkelberg and Holly Wade do not exude optimism in their report. After all, they point out, the index is still 2 points lower than it was at the beginning of the year. The economy is slowly righting itself, dealing with a huge excess supply of assets created in the 2003-2007 boom and the associated debt incurred to create those assets and take consumption to a record high share of GDP (the “party”). The 2000 stock crash left winners with cash and losers with worthless shares of lostmoney.com. We moved on, winners and losers declared. The housing bubble crash left a different set of assets for us to deal with. Declaring, even finding, winners and losers is a mess, not the least due to government trying to determine the outcomes. Not worthless pieces of paper but millions of houses, apartments, condos and less often discussed, retail stores, strip malls, restaurants and the like and a pile of inventory to get rid of. This process is difficult and protracted. In 2007, 845,000 new firms were formed (displacing 804,000 existing firms). This process went into reverse in 2008. More firms terminated, fewer started, fewer new homes were built, inventory went on sale to raise cash and employment was slashed as the now surplus of firms struggled to survive. Many of these sought loans to “tide them over”, loans that by now would in most instances have gone bad had they been made. The adjustment seems to be about over. Historically high percentages of owners report inventories are in balance, reduced to match anemic consumer spending. However few plan to add to stocks as prospects for improved growth have not been optimistic. Firms have stopped firing workers, employment has adjusted to weaker sales, but hiring new workers remains muted, as sales prospects offer little reason to hire more workers. Most equipment is still working requiring little need to buy new stuff. Still a problem is the number of firms competing for reduced levels of consumer spending, experiencing poor financial performance. There is likely more to come here, more terminations. This will increase sales at the remaining firms and with a boost from modestly improving consumer spending, begin to address the unemployment problem a bit more aggressively. The excess supply of structures will continue to be a drag, but less so. Read the full report here .

In her latest post at Economix , Nancy Folbre reminded us about the This American Life episode on job creation. Back in May, the producers at PRI 's TAL put together an hour titled How to Create a Job . They, and their friends from Planet Money , spoke with governors, bureaucrats, job seekers, journalists and economists about who actually has the capacity to create jobs. A couple of months later, the program is as relevant as ever. Take a listen: Click here to listen to select segments.