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November 22, 2011

The earnings impact of a job loss

Princeton University Professor Henry Farber recently spoke with the Atlanta Fed's Center for Human Capital Studies. Farber discussed some of his current research, including a paper titled "Job Loss in the Great Recession: Historical Perspective from the Displaced Workers Survey, 1984–2010." This paper explores the experience of those who lost a job as measured by the biennial Displaced Workers Survey conducted by the U.S. Bureau of Labor Statistics. The January 2010 version of the survey asked the question:

"During the last 3 calendar years, that is, January 2007 through December 2009, did (name/you) lose a job or leave one because: (your/his/her) plant or company closed or moved, (your/his/her) position or shift was abolished, insufficient work or another similar reason?"

I will focus here on Farber's estimates of the proportionate change in average real weekly earnings for workers who lost a full-time job in the last three years but had a job at the time of the survey. The time series of various cuts of these estimates are shown in the following chart.

Proportionate Change in Real Weekly Earnings of Workers Who Lost a Full-time Job

The earnings declines are clearly cyclical—larger declines during periods of weak labor market conditions and smaller declines when labor markets are stronger. While I had expected to see an earnings decline for workers who had lost a job, I also thought the 2007–09 period would have witnessed a much greater drop in earnings (via some combination of declines in hourly pay and declines in hours) than the declines seen in previous periods. This chart, however, suggests that the average weekly earnings of those losing full-time jobs did not drop much relative to earlier episodes of labor market weakness.

Those who lost and then regained a full-time job between 2007–09 (labeled "FT-FT" in the chart) experienced about a 10 percent decline in earnings on average, and that decline was no greater than during earlier periods. For those who took a part-time job (labeled "FT-PT" in the chart) the proportionate decline is large—about 55 percent. But again, this decline is no greater than the declines experienced in earlier periods. The proportionate earnings decline of about 22 percent for all workers who lost a full-time job and then regained some employment (labeled "FT-Lost" in the chart) is a bit larger than in earlier periods of labor market weakness. This result is because of the increase in the incidence of part-time employment for workers who had lost a full-time job, as shown in the following chart.

Fraction Part-time at Survey Date, by Part-time Status on Lost Job

In this chart, the fraction of re-employed workers who lost a full-time job during 2007–09 and were working at a part-time job at the time of the 2010 survey was 20 percent—well above historical levels.

My reading of this information is that the lower earnings of re-employed displaced workers don't appear to be contributing to the current sluggish aggregate income picture significantly more so than in the past. Instead we have to look at other factors, such as the continuing difficulty job losers have had finding a new job and especially a full-time job.

John Robertson John Robertson, vice president and senior economist in the Atlanta Fed's research department

November 22, 2011 in Employment, Labor Markets | Permalink

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November 18, 2011

Job creation by small firms: Age matters

Talking about the role of the average or typical small business in job creation is problematic. Discussing it is challenging because job creation is highly skewed along the age dimension of small firms. This point was driven home in a nice presentation (featuring the chart below) by John Haltiwanger at last week's small business conference cosponsored by the Atlanta Fed, the Board of Governors, and the Kauffman Foundation.


The chart shows the 90th and 10th percentiles of the employment-weighted job growth rate distribution by firm age (in years). The fastest-growing firms are the 90th percentile (in purple) of the growth distribution, and the fastest-shrinking firms are the 10th percentile (in green). The data are from the Census Bureau's "Business Dynamics Statistics" (for example, here is a related presentation by John Haltiwanger, Ron Jarmin, and Javier Miranda).

As the chart makes clear, the fastest-expanding 10 percent of young firms grow extremely rapidly. While the fastest-growing 10 percent of older firms also expand at a good clip, their growth is much slower than that of their younger-firm counterparts. Note that these are employment-weighted growth rates, so the outsized growth of fast-growing young firms is not an artifact of having a lot of firms with one employee simply doubling in size by hiring an additional worker. Firms that are contracting the most (shown in the 10th percentile) also are skewed along the age dimension, although the differences are not as dramatic.

These differences by firm age are a reason why we at the Atlanta Fed have tried to make our poll of small businesses more representative of the age distribution of firms and have recently been separately featuring the results for young and more mature businesses.

John Robertson John Robertson, vice president and senior economist in the Atlanta Fed's research department

 

November 18, 2011 in Employment, Labor Markets, Small Business | Permalink

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Are those ages in years? It would be nice to show the units on the graph, or mention them in the post... Maybe I missed it?

Posted by: eric | November 20, 2011 at 04:50 PM

All new firms are small. So, small is important. New firms did not fire 8 million people, existing firms did. There is no job growth unless there is population growth, that's why small firms create most new jobs, just a proliferation of the existing types of firms. The problem today is that existing firms are not fully staffed and we built too many in the boom. If existing firms were staffed up to their pre-2008 levels, the job situation would be much better. New firms can add to that, but at new jobs per NEW firms, we'd need 1.5 million to be added to the existing 6 million employers to re-employ those who lost their jobs. not likely

Posted by: Dunkelberg | December 21, 2011 at 08:50 AM

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November 10, 2011

Bank lending to finance a business start-up

On Wednesday and Thursday of this week I attended a conference titled "Small Business and Entrepreneurship during an Economic Recovery," presented by the Federal Reserve Board of Governors, the Federal Reserve Bank of Atlanta, and the Kauffman Foundation.

The conference agenda and papers are available here. Atlanta Fed President Dennis Lockhart gave one of the keynote addresses. His topic was business start-ups, job creation, and the role of banks.

Echoing the findings of research conducted by the Kauffman Foundation and others (for example, here and here), President Lockhart highlighted the vitally important role that business start-ups have played as job creators in the U.S. economy. He also made a distinction between true small business start-ups—those that intend to be small-scale operations (usually with single location and no more than a handful of employees), and growth-oriented start-ups. Both types of start-ups play a role in job creation, but the biggest impact over time comes from successful high-growth start-ups.

"Whether they're so-called 'mom-and-pops' or 'gazelles,' they create some jobs at inception. Inherently small enterprises either fail or sustain operations, but tend to level off in terms of employment. The growth businesses ramp up creating initial employment. They may fail in time, or they may grow to what is still small scale and level off, or they may break out and grow to large scale.

"A 2010 Kauffman Foundation study shows that just 1 percent of employer businesses—those growing the fastest—generate roughly 40 percent of new jobs in a given year. Three-quarters of those businesses are less than five years old."

So, if having a sufficient pipeline of new businesses is important to overall job creation, and especially enough start-ups with high growth potential, what is the role of banks as providers of financial capital to new business ventures? Because a new business is an inherently risky proposition, banks tend to provide a start-up loan only when it can be sufficiently collateralized. That collateralization often means using nonbusiness-related assets such as personal real estate. As President Lockhart's notes:

"The most prevalent form of hard collateral is real property. Start-up entrepreneurs often hear, 'If you'll put up your house, we'll lend to your new business.' Real estate related to the business—to the extent the entrepreneur needs such and actually owns it—can be problematic as collateral because its value may be a function of the business cash flow it helps generate."

The results of Atlanta Fed's most recent poll of small business credit conditions in the Southeast are consistent with the view that the combination of weak economic conditions and lower real estate values since 2006 has significantly reduced access to bank loans as a source of start-up capital. One of the questions in the poll asks: "When you started the business, what sources of financing did you use?" We are able to separate the answers from owners of mature businesses (those starting more than five years ago) and younger businesses (those starting in the last five years). The findings are summarized in the following chart.


Although the sample size is pretty small, I found the results to be quite striking. The younger businesses we talked to were much less likely to have used a business loan or line of credit from a bank when they started than their more mature counterparts. Instead, these younger businesses were more likely to have used personal savings or some other source. Almost certainly, these differences between older and younger firms are not simply because young entrepreneurs suddenly didn't want to get start-up financing from a bank.

There's obviously still a lot to learn about the business creation process, including the financing of new business ventures in today's economic and financial environment. I believe it's important that these topics are moving up in the list of national priorities and that the body of research dedicated to them, as evidenced at this conference, is growing.

John Robertson John Robertson, vice president and senior economist in the Atlanta Fed's research department

 

November 10, 2011 in Economic Growth and Development, Employment, Labor Markets, Small Business | Permalink

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>what is the role of banks as providers of financial capital to new business ventures?

The answer is 'none'. That's risk capital's job. Banks have no business taking deposits for safe-keeping and leveraging it to buy debt or other instruments backed by dubious or zero collateral.

Sorry, I forgot--post-Glass-Stegall, that's exactly what happened. I guess you're right, if JPMorgan can put up its $900B in retail accounts as collateral to support its $99T derivatives positions, why can't they make uncollateralized loans to new businesses backed by "good ideas"?

Posted by: Dan Nile | November 19, 2011 at 09:03 AM

Banks have no business taking deposits for safe-keeping and leveraging it to buy debt or other instruments backed by dubious or zero collateral.

Posted by: Franchising Advice | December 28, 2011 at 02:23 PM

Banks are always accessible since they are used regularly for depositing savings or withdrawing them. After being bank customers for years, the bank becomes convenient and familiar, and personalized service makes it the first place to consider for a loan.

Posted by: Bank Lending Criteria | May 03, 2012 at 07:51 AM

Banks could be the back up of a business if they suffer from a financial issue for their business especially in business funding.

Posted by: Confidential Invoice Factoring | May 08, 2012 at 11:40 PM

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