Monday, November 5, 2012

Facts about jobs that may surprise you

A lot of attention is paid to net job flows in the economy--the net amount of jobs created in a given month, quarter, or year. Less attention is paid to gross job flows, but they tell a very interesting story about the US job market.

Gross job creation refers to employment gains at expanding and new establishments (plants or business locations); gross job destruction refers to employment losses at shrinking or closing establishments.* These numbers can tell us a story about job reallocation, or flows of jobs between business establishments (and between industries, states, or whatever).

To see why this is interesting, consider the following figure (click for larger image).**

Note that the chart records job flows in a given year as of March of that year; the Job Creation (blue) bar for 2010 refers to employment gains at expanding establishments between March 2009 and March 2010.

The depths of the Great Recession are captured by the bars for 2009 and 2010. Observe that in these years, businesses hired around 14 million new employees! In a private workforce of 110 to 120 million total employees, 14 million hires is significant. Many businesses opened or expanded during the depths of the recession. This probably surprises some people.

The problem, of course, is illustrated by the Job Destruction (red) bars. Between March of 2008 and March of 2009, shrinking or closing businesses destroyed almost 20 million jobs. That's almost one-fifth of the US economy.

Job recessions can be easily seen in this chart. When the blue line is taller than the red line, the economy has added jobs on net. When the opposite is true, national employment has declined.***

What should we learn from this chart? I can think of a few things:
  1. Even during recessions, the US economy is amazingly dynamic. Overall unemployment may be increasing, but many workers still move between businesses or from unemployment into employment. The majority of workers separated from their jobs can be absorbed by new or expanding businesses.
  2. Not all businesses are harmed by recessions. Some businesses expand significantly or are newly created during recessions, while other businesses shrink or close.
  3. Likewise, during periods of strong economic growth, many businesses are shrinking or closing. It's not always obvious what this means: businesses could be laying off workers while profits increase if productivity is increasing (but those workers can typically find jobs at expanding businesses). In other cases, though, businesses are shrinking or closing because they are unsuccessful--bad ideas, bad management, bad local conditions, or bad luck--even while the overall economy grows.
  4. The net jobs numbers hide a lot of labor market churning--reallocation and creative destruction.
  5. Discovering the nature of job flows is important. Are there strong net flows from some regions to others? From some industries to others? From small firms to large firms or vice versa? From young firms to old firms, or vice versa? How do flows relate to the business cycle? These questions matter for both policymaking and personal/business planning. There is a large economic literature on each of these.
  6. For economist readers, these data should illustrate some limitations of representative firm models.

*More precisely, these job flows definitions are discussed here and are defined as:
(Gross) job creation at time t equals employment gains summed over all business units that expand or start up between t-1 and t.
(Gross) job destruction at time t equals employment losses summed over all business units that contract or shut down between t-1 and t.
These measures are good for measuring flows between business establishments. They are useless for measuring within-establishment flows. 

**Data from Business Dynamics Statistics (BDS). These are aggregated from establishment-level administrative data and are subject to long release lags. 2010 is currently the most recent year available. Note that the BDS can be thought of roughly as the "population" for both the CES and JOLTS surveys, except that those surveys also include government.

***The difference between the blue and red bar for a given year should roughly equal the sum of the popular monthly private nonfarm payroll growth measure released by the BLS (summed over 12 months from March to February).