Sunday, March 20, 2011

Job Creation and Destruction

Although the phrase “creative destruction” was introduced by Joseph Schumpeter (1883-1950), describing capitalism, the idea goes back to Karl Marx. But, needless to say, this characterization of almost anything extends way beyond the economic. Put more neutrally, it describes the two polarities of all things living: birth and death. Let’s take a look at this pairing—but narrowly focused on jobs.

One of the Census Bureau’s least known programs is Business Dynamics Statistics (BDS)—perhaps because it was a joint venture between the Bureau and the Ewing Marion Kauffman Foundation. The program is accessible here. The program describes itself thus:

The Business Dynamics Statistics (BDS) includes measures of establishment openings and closings, firm startups, job creation and destruction by firm size, age, and industrial sector, and several other statistics on business dynamics.
Data from this program, available from 1977 through 2009 permit me to chart job creation and destruction over a thirty-plus year period.

The graphic shows total jobs created by commercial firms in every year by whatever means (blue line) and the jobs destroyed, also by whatever means (red line). The net result of these two processes is charted in solid green. Notice that in those years where destruction is greater than creation, the green line dips into the negative.

Now both job creation and destruction can take one of two forms. Creation may arise because (A) a new company forms and hires employees—or because (B) an existing firm hires additional employees. Conversely, job destruction may take place because (A) a company goes out of business, closes its doors, good-bye—or because (B) an existing firm lays off or releases employees.

A second set of curves gives us an indication of the numbers associated with Option A above: hires due to new company formation and job losses due to going out of business. The net of these two processes is shown as a dotted green line.

The data used in this graphic are available here by clicking on one of the Economy Wide label’s options.

What the graphic shows is the role of new businesses in the economy as a whole. Their share in job creation is significantly smaller than the total. Similarly, job destruction by closing the doors is also a relatively small part of total jobs lost. These two are related because most of the firms going out of business are also small. Death in early childhood is much more common among companies, these days, than among people. Of interest here is that start-up job creation has exceeded going-out-of-business job losses in every year except 1983 and 2009—and, the rather dramatic negative total for all firms in 2009—brought to you by The Speculators…and a Government Asleep at the Switch.

Soon I’ll present here a state-by-state graphic showing what percentage new firms represent of total employment.

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