FREE ESSAY ON THE CONTRIBUTION OF ETABLISHMENT DEATH AND BIRTHS TO EMPLOYMENT GROWTH

THE CONTRIBUTION OF ETABLISHMENT DEATH AND BIRTHS TO EMPLOYMENT GROWTH

I. Introduction
The relatively recent development of longitudinal establishment datasets has generated
quite a
bit of excitement in both the academic and the statistical communities. From this
literature, we
have learned that there is a large amount of volatility at the individual establishment
level that
underlies the smooth time series of aggregate employment growth. The descriptive
statistics
coming out of this literature have not only stimulated the review and updating of
existing labor
market theories, but have also stimulated the U.S. statistical agencies to develop their
administrative datasets in such a way so as to produce longitudinal job flow statistics.
The
purpose of this paper is to use a new longitudinal database from the Bureau of Labor
Statistics
(BLS) in order to examine how establishment births and deaths contribute to job creation,
job
destruction, and net employment growth at different frequencies of measurement.
Despite all that we have learned about the labor market from the existing job flows
literature,
the conclusions that can be drawn from these studies are somewhat limited. First, almost
all of the
existing work using U.S. data has been restricted to the manufacturing sector. Recent
work by
several authors has illustrated how job creation and job destruction in manufacturing may
not be
representative of the entire U.S. economy.
1
A second limitation is that most of the existing
empirical work on job flows, either by choice or by necessity, is based upon data that
excludes the
smallest establishments.
2
Since most establishment births and deaths are quite small, at least in the
short run, we are thus unsure how these births and deaths influence employment growth.
While
data that focuses on large establishments will cover most employment, an analysis of job
flows
depends on the magnitude of employment flows at continuing establishments relative to
the
incidence and average size of establishment births and deaths.
The longitudinal database introduced in this paper is not subject to either of these
limitations.
The microdata upon which this paper is based are the unemployment insurance reports that
1 The studies by Davis and Haltiwanger (1990, 1992), Davis, Haltiwanger, and Schuh (1993,
1996), and
Dunne, Roberts and Samuelson (1988, 1989a, 1989b) have all used manufacturing data housed
at the
Center for Economic Studies at the U.S. Census Bureau. Recent work with unemployment
insurance data
by Anderson and Meyer (1994), Foote (1997), Lane, Stevens, and Burgess (1996), and
Leonard (1987)
has looked at other sectors of the economy.
2 Small plants with less than five employees are not in the sample frame of the Annual
Survey of
Manufactures (ASM) data used by Davis, Haltiwanger, and Schuh (1996); these plants
represent about
one-third of all plants and about 4 to 7 percent of employment. Using the Census of
Manufactures,
Dunne, Roberts and Samuelson (1989a) exclude manufacturing plants with less than 5
employees; these
excluded plants account for between 30 and 40 percent of all plants but represent only
one percent of
employment. The firm sample used by Anderson and Meyer (1994) includes only firms with at
least 50
employees; this sample accounts for 83 percent of employment.
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