| February 4, 2011
A Look at Births and Deaths of Oklahoma Businesses
In the last two issues of Perspective, we looked at two avenues of job creation: the in- and out-migration of business establishments, and the expansion and contraction of existing establishments.
This month we will examine a third avenue of job creation: the births and deaths of Oklahoma establishments. And again, we do so by using a powerful new database of Oklahoma’s businesses called the National Establishment Time-Series (NETS) database.1
Every year in Oklahoma, new establishments and jobs are born (births),2 while existing establishments cease to exist, taking their jobs with them (deaths).3 Understanding this dynamic process relating to the creation of jobs from the births and deaths of establishments is the final step to ensuring that public policy helps rather than hinders job creation.
Oklahoma Jobs Gained and Lost
Each year between 1993 and 2008, new Oklahoma births, on average, created 84,012 jobs while establishment deaths destroyed 79,204 jobs—leaving an average annual job gain of 4,808.4 Over the entire 15-year time period examined in this study, net establishment births created 76,938 jobs.
Chart 1 and Table 1 show that Oklahoma’s year-to-year fluctuations in employment are significantly affected by the net job creation from births and deaths. In fact, the two are 94 percent positively correlated—which means they virtually move lockstep in the same direction. In the five years that total employment is negative, so is the net job creation from births and deaths. Additionally, the drop in jobs from net births and deaths is greater than the drop in total jobs—strongly suggesting that the drop in jobs due to births and deaths leads the drop in total jobs.
Chart 2 and Table 1 shed light on whether expansions or contractions are driving the overall trend. Interestingly, the volatility of births and deaths, as measured by the deviation from their average value, is virtually identical. This means that when births and deaths decline, job creation from births is reduced and job loss from closures is increased at about the same rate.
Overall, this analysis shows that the births and deaths of establishments significantly explain the year-to-year job fluctuations.
Table 2 shows the net change in jobs created by births and deaths between 1993 and 2008 as a percent of employment in 1993. Oklahoma’s 76,938 jobs created due to net establishment births equates to a gain of 5 percent of Oklahoma’s 1993 workforce. Oklahoma’s performance ranks below average, at 30th in the country. In stark contrast, the state with the largest job growth due to net births was Florida (44.7 percent).
Every neighboring state ranked higher than Oklahoma except two—Kansas (3.8 percent, ranked 32nd) and Missouri (2.9 percent, ranked 35th). The other four neighboring states performed better: Arkansas (11 percent, ranked 21st), Colorado (16.9 percent, ranked 10th), New Mexico (9.7 percent, ranked 22nd), and Texas (9.3 percent, ranked 24th).
This study concludes our three-part series examining the components of Oklahoma’s year-to-year change in jobs. Net jobs created from births and deaths are the most significant component explaining total job creation. When comparing Oklahoma nationally and regionally, job creation from births and deaths is below average, so revving up the job creation engine in this regard is critical.
While births and deaths are about equally responsible for the net creation/destruction of jobs, it is the birth of new establishments that is more critical because it requires the sustained nourishment of entrepreneurship. It is entrepreneurs who are able to create a new business and new jobs out of thin air. Encouraging this risk-taking is what pays off in the long run.
How might policymakers help encourage entrepreneurs to start new businesses? One way is to increase the after-tax payoff. In the first few years, most businesses invest heavily in capital equipment. Normally, those purchases must be depreciated over 10, 20, or more years. Since most start-ups fail within the first five years, those tax write-offs are virtually worthless to them.
A better solution is to allow the immediate and unlimited expensing of new equipment purchases. This would encourage investment while lowering the tax burden on start-up businesses.5 Additionally, sweeping away depreciation schedules and all the accompanying paperwork would dramatically reduce tax-compliance costs on entrepreneurs. That’s time and money better spent on business matters.
1. NETS is based on the far-reaching Dun & Bradstreet Marketing Information file that has tracked more than 41.7 million establishments nationwide between 1989 and 2008. The file tracks businesses via an assigned “DUNS number,” which is the business equivalent of a personal Social Security number. The NETS database is the most comprehensive establishment-level census available. The firm Walls & Associates performs the conversion of the Dun & Bradstreet Marketing Information file into a time-series database that is useful for economic research purposes. The file is proprietary to Walls & Associates, which licenses the database to researchers across the country—including the U.S. Department of Commerce’s Census Bureau and the Bureau of Economic Analysis.
The NETS database is based on establishments, which means that one organization can have numerous establishments in various locations, e.g., Starbucks. Additionally, different establishments can occupy the same location. For example, an organization at a single location could represent two different activities—such as a single organization with both a distribution and a retail establishment under the same roof. This structure provides an unprecedented level of geographic and industry classification.
Though this study will use the term “Oklahoma jobs,” it does not mean that those employed are all Oklahoma residents. Since jobs are reported on a per establishment basis, there is no information on the residency of the workforce. Therefore, someone living in Texas but working for an Oklahoma establishment would be included in the “Oklahoma employment” number.
2. More broadly, births are a useful benchmark in measuring the overall level of entrepreneurial activity. Yet, solely measuring births understates entrepreneurship since the NETS database reclassifies the organization as an existing organization in the years after the birth year. Ideally, a more comprehensive metric of entrepreneurship would track these organizations throughout each organization’s lifespan to better understand other important issues such as the survivor rate.
3. Closures are defined in the NETS database as the elimination of a DUNS number. However, DUNS numbers may also be eliminated by one organization absorbing another organization. As a result, some jobs due to closures will reappear in the database as expansions of existing organizations. This bias will lead to some overestimation of jobs lost to births and deaths.
4. This study draws on data for national comparisons from www.YourEconomy.org (YE), which is based on the national NETS database. YE is a project of the Edward Lowe Foundation. For technical reasons, the YE website uses the NETS database for the years 1993 to 2008.
5. Immediate expensing is not so much a tax reduction as it is a tax shift. The same amount of tax revenue will be collected, but over a longer time period.
Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.