The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

February 15, 2013

Promoting Job Creation: Don't Forget the Old Guys

In a provocative article posted this week, the American Enterprise Institute's James Pethokoukis concludes that the state of entrepreneurship in the United States is, disturbingly, weaker than ever. In particular, Pethokoukis documents a decline in jobs created by establishments less than one year old, a trend that began before the 2001 recession and has continued more or less unabated since. He specifically cites the following symptoms of trouble:

  1. Had small business come out of the recession maintaining just the rate of start-ups generated in 2007, according to McKinsey, the U.S. economy would today have almost 2.5 million more jobs than it does.

  2. There were fewer new firms formed in 2010 and 2011 than during the Great Recession.

  3. The rate of start-up jobs during 2010 and 2011—years that were technically in full recovery—were the lowest on record, according to economist Tim Kane of the Hudson Institute.

That last point appears to be all the more ominous given this observation from Tim Kane:

"...that startups create essentially all net new jobs. Existing employers, it turns out, tend to be net job losers, averaging net losses of 1 million workers per year."

Pethokoukis makes his case with political commentary that we don't endorse and don't find particularly helpful. But we won't argue with his conclusion that more entrepreneurial start-up activity would be a good thing. Nonetheless, we get a little concerned when the conversation jumps from data on net job creation and the role of start-ups and early life-cycle firms, and moves on to policy conclusions that seem to disproportionately focus on that class of businesses specifically.

Here is the source of our concern: Though it is also tempting to lump all "existing employers” into the basket of net job destroyers, there are existing firms that create jobs, and a few are doing so on a very large scale.

Take 2006, for instance. Based on data from the Commerce Department called Business Dynamics Statistics (BDS), new firms (businesses with a payroll that existed in March 2006 but not in March 2005) had about 3.5 million employees. This is the large net job creation by new firms reported by Kane. However, over the same year, expanding firms more than 10 years old added a whopping 11 million jobs—about three times as many jobs as created by new firms. Of course, some older firms were downsizing or closing—contracting mature firms destroyed an estimated 10 million jobs. So the net number of jobs created by older established firms looks somewhat less impressive than the record of those young start-ups. But in the overall picture, were the 11 million jobs created by the expanding older businesses really less important than 3.5 million created by the newbies?

It turns out that older firms also account for a large fraction of the job creation occurring in fast-growing firms, arguably a better characterization of entrepreneurism than newness. We found some compelling evidence reported in recent research by Akbar Sadeghi, James Spletzer, and David Talan. Using data from the U.S. Bureau of Labor Statistics' Business Employment Dynamics (BED), Sadeghi, Spletzer, and Talen find that older firms (those at least 10 years old) accounted for more than 40 percent of the employment created by high-growth firms (those with at least 20 percent annual employment gains between 2008 and 2011). A similar conclusion about the role of older, fast-growing firms is found in this earlier Kauffman Foundation report based on BDS data looking at the 1 percent of fastest-growing firms in the United States.

The point is not that start-up entrepreneurial activity is unimportant. It is vitally important. But in larger terms, we should recognize that all entrepreneurial activity is important, no matter what the age of the firm in which it occurs. Atlanta Fed President Dennis Lockhart highlighted this point in a speech delivered earlier this week at Instituto de Empresas in Madrid, Spain:

My bank's experience in trying to understand the role of small businesses, small-growth businesses, young businesses, and mature-growth businesses in job creation illustrates a key point, I think. In the pursuit of economic growth and increased employment, there is no silver bullet. Rather, the policy community should be pursuing an effective mix of policy elements (with focus in areas such as new business formation, labor rules, and regulatory efficiency, to name a few) that together catalyze a virtuous circle of innovation, growth, and employment.

Certainly, entrepreneurial risk-taking, whether by large, mature businesses or start-ups aimed at becoming growth companies, is part of the solution.

When it comes to promoting job creation, forgetting to throw mature businesses into the mix with start-ups is surely not the path to finding the best policy solutions.

Dave AltigBy Dave Altig, executive vice president, and

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

February 15, 2013 in Employment, Labor Markets, Small Business | Permalink


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I think that to a certain extent the decline in new business formation in 2010-2011 as opposed to 2009 is a bit of a statistical illusion for a couple of reasons.

First, a lot of the start ups in 2008 and 2009 reflect arangements that were first agreed to in 2007 or before--there is a delay between the time when the committment to start a new business is made and when the articles of incorporation are actually filed. Moreover, business cycles follow a bit of a learning curve--back in 2008 and most of 2009, people thought the recession was a lot smaller than it actually was, a misunderstanding that was cleared up with better data in 2010.

Second, there is an extent to which small and new businesses are an inferior good. New businesses typically specialize in smaller orders and attempt to undersell large established suppliers. At the height of the recession, customers downsized, switching from large established providers to small/new competitors in an effort to reduce spending. As the owner of one of these small businesses during the recession, it was definitely my experience that while the type of customers changed in 2008-2009, overall business was still up compared to 2007. That ended when, in 2010, customers started up-sizing again and went to the larger industrial suppliers, so that my business wasn't really hit by the recession until the recovery was in full-swing. If this is a common experience, then the data will show that small/new businesses fared better than large established business in 2008-2009, but then took a hit in 2010-2011.

Posted by: Matthew Martin | February 16, 2013 at 03:27 PM

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February 05, 2013

2013 Business Hiring Plans: Employment, Effort, Hours, and Fiscal Uncertainty

How much is fiscal uncertainty holding back hiring? The answer seems to depend on whom you ask. Early in January, the Atlanta Fed spoke to 670 businesses in the Southeast about employment. Conditional on the respondents’ 2013 hiring plans (expand, hold steady, or contract), the following set of charts summarizes the results for how the businesses viewed activity relative to their own interpretation of “normal” along three dimensions: their current employment level, the amount of effort required from their staff per hour, and the average hours worked per employee. These questions were modeled on questions asked in the Atlanta Fed’s December 2012 Business Inflation Expectations Survey. In the following three charts, the green bars represent firms that said they planned to expand employment in 2013. The grey bars represent firms that said they did not plan to change their employment level in 2013, and the red bars represent firms that planned to reduce employment in 2013.

The first chart shows the results for current employment. Regardless of hiring plans over the next 12 months, most firms said they were currently at or below normal employment levels. Those planning on increasing employment over the next 12 months were a bit more likely to say they have already surpassed normal levels of employment than other firms, while those looking to shed employees were very likely to say their employment level is below normal employment levels.


Chart 2 shows that businesses are generally pushing hard along the effort dimension. Firms were quite likely to say that their staff’s effort per hour worked was currently at or above normal,  whether or not they were planning to change employment in 2013.


Chart 3 shows that firms planning to expand were very likely to say that average hours worked were at or above normal (28 percent said hours were above normal, 60 percent about normal), whereas firms planning to contract were more likely to say that hours were at or below normal (48 percent about normal, 39 percent below normal).


Taken together, these results suggest that some firms are approaching the limit of how far they can go along the intensive margins of effort and hours before they have to hire more workers. With effort elevated, as more firms increase average hours worked to above-normal levels, one might expect more hiring to follow.

Each business was also asked how uncertainty about future fiscal policy was affecting its hiring plans. Firms planning to reduce employment tended to cite fiscal uncertainty as having a negative impact on their hiring plans. However, for those firms, hours also tended to be well below normal, so it is unlikely that removing fiscal uncertainty would move many of those firms into expansion mode (although it may help stabilize their outlook).

In contrast, fiscal uncertainty was generally viewed as having less impact by those planning to expand employment and those planning to hold employment levels steady. Presumably, reducing fiscal uncertainty would move some of the firms planning to hold steady into expansion mode, and those planning to expand would do so a bit more. To get some idea of this potential, Chart 4 shows the responses by firms who reported above-normal effort per hour and above-normal average hours worked. About 40 percent of those businesses said that fiscal uncertainty had caused them to scale back their hiring plans.


It is unclear whether eliminating fiscal uncertainty would have a big impact on the hiring plans of these firms. But these results suggest that it sure couldn’t hurt.

John RobertsonBy John Robertson, vice president and senior economist, and

Ellyn TerryEllyn Terry, a senior economic analyst in the Atlanta Fed's research department

February 5, 2013 in Employment, Labor Markets, Small Business | Permalink


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December 12, 2012

Anticipating Growth despite a Slowdown? Results from the Recent Small Business Survey

The latest reading on the Wells Fargo/Gallup's Small Business Index indicated business conditions for small firms dropped to the lowest levels since July 2010 (see the chart), and index also said:

Key drivers of this decline include business owner concerns about their future financial situation, cash flow, capital spending, and hiring over the next 12 months.


The latest iteration of the Atlanta Fed's small business survey, which was conducted in October, also noted a decline in 12-month-ahead expectations for sales, hiring, and capital spending (see the chart).


Dissecting this by firm age, the overall decline in expectations stemmed from the firms in our sample that were more than five years old (see the charts).




Over the life of the survey, young firms have tended to be more optimistic about changing business conditions. Are these young firms simply naïve about changing economic conditions, or are they anticipating growth despite expectations for a pullback in the broader economy? We asked the following question this time around in an attempt to capture the business owners' aspirations and job-creating "gazelle" potential:

Five years from now, do you anticipate your business will be:

a) Smaller
b) About the same
c) Somewhat larger
d) Significantly larger

It turns out the group is an optimistic bunch: 30 percent of employer firms said they thought their business would be significantly larger in five years, and firms under six years of age were twice as likely to say so (see the chart). Considering that young firms also tend to have smaller operations than mature firms (the median young firm had from $100,000 to $500,000 in annual revenues and the median mature firm had from $1 million to $7 million), this difference is not shocking.


What was a little surprising was how few of the young firms said they thought they would be smaller in five years. Research suggests that that only about half of businesses make it past five years, and yet only three young firms identified themselves as shrinking. There is always the chance that these young businesses will become fast-growing, job-creating gazelles. After all, a recent study of high-growth firms by the Kauffman Foundation found the average age of the fastest-growing firms in 2010 was only seven years old.

Will they achieve their goals? Only time will tell.

The Atlanta Fed's third quarter small business survey, which asks firms questions about business and financing conditions, is available on our website.

Ellyn TerryBy Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department


December 12, 2012 in Small Business | Permalink


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November 29, 2012

Gazelles, and Why They Matter

A gazelle, as you may recall from your favorite wildlife show, is one of those antelope-like animals that run around in herds across the plains and are known for their speed. Sheltered by the herd at birth, their youth is short-lived. In no time flat, gazelles are expected to be up and running or they will be easily devoured by hungry lions.

Probably because of that imagery, the word gazelle is also used in the business literature to represent a young firm that grows very quickly in a relatively short period of time. According to Kauffman Foundation research, the fastest-growing 1 percent of firms typically account for about 40 percent of job creation in the United States. Of that 1 percent, three-quarters are less than six years old. Research also shows that these high-growth young firms are more likely to provide solutions to other businesses than directly to consumers, have some form of intellectual or technological property, and tend to be started by entrepreneurs with business startup experience.

To learn more about the role of gazelles and the challenges they face, the Federal Reserve Bank of Atlanta recently hosted Amy Wilkinson, a senior fellow at Harvard University and a policy scholar at the Woodrow Wilson Center. Wilkinson is a leading entrepreneurship scholar. Her current research focuses on entrepreneurs who scale their company to reach $100 million in revenue in less than five years. (You can see her discussing the topic here.) She has shown that these "founders" tend to drive innovation, and ultimately job creation, in the U.S. economy. These young, high-growth firms are typically driven forward by entrepreneurs with high aspirations, novel ideas, and a strong support system. This support system is analogous to the gazelle's herd—it is a network of financial and human capital providers that help the businesses grow to potential.

To get a perspective on the key drivers and impediments to growth for high-growth-potential firms in the current economic climate, the Atlanta Fed also hosted an entrepreneur roundtable in November. The roundtable included founders of Southeast-based businesses in various stages of development, along with representatives of "the herd."

Many participants indicated that attracting capital in the Southeast has always been challenging, but it has been even more difficult in recent years. Investors in general are more hesitant to take on risk, and the market available for early-stage financing has shrunk. But the biggest impediment to growth in recent years has been the recession and the halting nature of the recovery. The Atlanta Fed's poll of small businesses has noted that business startups today are much more reliant on personal capital versus external capital than was the case for businesses started prior to the recession. The word "uncertainty" was also mentioned a lot, prompting even this group of risk takers to take a bit more conservative stance in their growth expectations.

On the topic of labor, many of these firms cited the importance of having the right talent in place to make a business successful. Participants noted that the person who starts a business is often not the right person to propel the business forward. Recognition of the correct timing of a leadership change and the ability to make hard decisions generally were deciding factors on whether a firm would continue to grow rapidly or plateau. The Kauffman Foundation also cited the important role of talent in its poll of fast-growing firms conducted last year.

Another theme of our recent conversations with entrepreneurs and business experts is the crucial role of the supporting herd in nurturing and enabling a young business to succeed. In building a business from the ground up, a first-time entrepreneur confronts a significant learning curve—from figuring out the tax code to securing financing. The business information and support networks that exist are evolving, but matching ideas to money to people is still not a straightforward process. To complicate things further, "the herd" is not a one-size-fits-all concept; it differs geographically and across industry. As highlighted in a recent Kauffman Foundation study, high-growth firms are more prevalent in some areas of the country, and there are hot spots for certain industries. One group working to make these connections stronger and more efficient is Invest Atlanta, the city of Atlanta's economic development agency. The agency recently launched Start Up Atlanta. The stated aim of Start Up Atlanta is to "…bring together and build Atlanta's entrepreneur ecosystem." Similar efforts are under way across the region.

Considering the significant impact that high-growth firms play in innovation and job creation, researchers at the Atlanta Fed continue to explore the various issues facing young, high-growth potential firms. If you are a small firm and are interested in contributing to this research, we would love for you to sign up for our semiannual poll of small business financing by sending an email to smallbusinessresearch@atl.frb.org.

Whitney MancusoBy Whitney Mancuso and

Ellyn TerryEllyn Terry, senior economic analysts in the Atlanta Fed's research department


November 29, 2012 in Small Business | Permalink


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We have to do whatever creates jobs

Posted by: Travis | November 30, 2012 at 11:07 PM

Agreed with Travis, You have to do something which creates jobs otherwise we will all be lost...

Posted by: Maz | December 05, 2012 at 12:51 AM

We agreed with travis, need to creates jobs, and process for applying also

Posted by: alex jhon | November 29, 2019 at 08:37 AM

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October 04, 2012

Trends in Small Business Lending

The Atlanta Fed's latest semiannual Small Business Survey is active through October 22, 2012. If you own a small business and would like to participate, send an e-mail to SmallBusinessResearch@atl.frb.org.

In our previous survey conducted in April 2012, we found that firms applying for credit at large national banks had notably less success than firms that applied to small banks.


We also found that the firms applying to large banks tended to be much younger than the firms that applied to small banks. We speculated that this "age factor" could be contributing to the lower overall success rates at large banks.

A difference between small businesses' success at large and small banks has also been documented by the online credit facilitator Biz2Credit. Biz2Credit works a bit like an online dating service—after answering a series of questions (and providing the typical financial documents required by lenders), small businesses are presented with five potential "matches." To determine the best five matches, Biz2Credit identifies what lenders are looking for—usually a certain credit score, a minimum number of years in business, an established banking relationship, and targeted industries.

The resulting credit applications are the basis for the Biz2Credit Small Business Lending Index. Biz2Credit also reports approval rates from the matching process for large banks, small banks, credit unions, and alternative lenders. These approval rates are plotted on the chart below.


Much like we saw in the Small Business Survey, Biz2Credit reports that small firms have had consistently less success in obtaining credit at large banks.
Confirming our results encourages us that our April observation was a good one. But confirmation isn't explanation—what accounts for the different experiences small businesses have in securing credit from small banks versus big banks? And so, we dig deeper.

Note: According to Biz2Credit, its index is based on 1,000 of the 10,000-plus applications submitted each month. To be included, the business has to have at least a 680 credit score, be at least two years old, and have an established relationship with the bank to which it is applying. Selection methods are also applied to provide for national representation.

Photo of Ellyn TerryBy Ellyn Terry, senior economic research analyst at the Atlanta Fed

October 4, 2012 in Banking, Small Business | Permalink


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According to Biz2Credit, its index is based on 1,000 of the 10,000-plus applications submitted each month.

Posted by: jewelry supplies | December 05, 2012 at 04:53 AM

Much like we saw in the Small Business Survey, Biz2Credit reports that small firms have had consistently less success in obtaining credit at large banks.

Posted by: badrum badkar | December 06, 2012 at 12:49 AM

To be included, the business has to have at least a 680 credit score, be at least two years old,

Posted by: Marvel War of Heroes hack | December 10, 2012 at 12:02 AM

Biz2Credit reports that small firms have had consistently less success in obtaining credit at large banks.

Posted by: nursing training | December 13, 2012 at 05:10 AM

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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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August 18, 2011

The new firm employment puzzle

Last week, John Bussey of the Wall Street Journal identified some discouraging statistics from the U.S. Bureau of Labor Statistics "Business Employment Dynamics" (BED) program concerning the number of new establishments (a specific physical location like a store) and the number of jobs from new establishments. These data are replicated in the following chart, which shows both a steep decline in the number of establishments over the last few years but also a decade-long trend of a declining number of jobs coming from new establishments.

BED New Establishment Data Annual

Not only has the number of new establishments declined, but the average size of new establishments has also tended to decline over time.

BED New Establishment Data: Average Size Annual

If small businesses, or more specifically new small businesses, are an engine of job growth in the United States, that particular engine has been getting less powerful. Between March 2009 and March 2010, new establishments generated 1 million fewer jobs than over the period from 2005 to 2007. About 85 percent of that decline was related to a reduction in the number of new establishments. The other 15 percent was attributable to the smaller average size of those new establishments. In contrast, the 1 million fewer jobs per year coming from new establishments between the years 2000 and 2005 were all attributable to a decline in the size of the establishments—the number of new establishments per year actually rose slightly over that period.

The BED program also maintains a quarterly series on establishment births (the annual data are for the year ending in March). The quarterly data show that the number of new establishments rebounded over the latter half of 2010 to a pace comparable to the late 1990s. But the associated number of jobs did not increase proportionately.

BED New Establishment Data Quarterly

So while there appears to have been a healthy pick-up in the number of new establishments in late 2010, the gradual march toward ever-smaller new establishments seems to be continuing.

The changing industrial composition of the economy doesn't seem to be the explanation for the declining establishment size trend—the pictures look basically the same if sectors such as manufacturing and construction are excluded. Perhaps it is that new establishments are simply more able than older establishments to adopt new technologies and processes that reduce the demand for labor because they have no legacy employment or capital to deal with.

How robust are these findings? The BED data do have some drawbacks. For example, the BED data are extracted from the administrative unemployment insurance records for businesses that have payrolls (employees). This covers the vast majority of workers in the United States (about 98 percent of employees on nonfarm payrolls and 94 percent of total employment) but not the majority of businesses (U.S. Census Bureau figures for 2006 report that there were about 3.5 times as many firms without employees other than the owner(s) than firms with employees). Also, these data do not distinguish between a new location that is part of a new firm and a new location that is part of a larger multi-establishment firm (like a national chain).

The Census Bureau maintains a related, but different, data set—the Business Dynamics Statistics (BDS)—that allows distinguishing between new firms and new establishments. However, the latest publicly available data only go through the year ending March 2009. The BDS data for new establishments from new firms and the jobs from those new establishments are shown in the next chart. Like the BED data, the BDS new firm data show that the number of new establishments peaked in 2006 and has been trending lower since.

Number of New Establishments

However, the two data sources differ in terms of job creation: the BED new establishment employment data peaked in 1999 and has been declining steadily since, while the BDS new firm employment data peaked in 2006 and was relatively stable prior to that.

Number of Jobs at New Establishments

Compared to the BED data, the average size of new establishments from new firms in the BDS data has changed relatively little over time—the swings in the number of establishments and employment in the BDS data move about in proportion to each other.

Average New Establishment Size

Interestingly, the BDS data on the average size of new establishments at firms of all ages (new firms as well as older firms) appears to be more cyclically sensitive than the new firm data, suggesting that older firms respond more to prevailing economic conditions than new firms do. Neither of the two BDS series displays the secular trend apparent in the BED data over the last decade.

Why do inferences about new establishments from the BED and BDS data differ? I don't know. This 2009 paper by U.S. Bureau of Labor Statistics economists Akbar Sadeghi, James Spletzer and David Talan tries to reconcile the differences but concludes that a definitive answer would require linking the data series together to compare the measures for matched establishments.

There is plenty of scope for investigating the dynamics of new business formation using data at a U.S. Census Bureau Research Data Center (RDC). The newest RDC will be located at the Atlanta Fed, which has partnered with six other research institutions to apply for and be approved to operate the 13th RDC location in the United States. The Atlanta Census Research Data Center will be a secure location where approved researchers will have access to restricted microdata in order to investigate questions like these. The Atlanta RDC is scheduled to open in September. For researchers in the Southeast interested in exploring research opportunities at the Atlanta Census Research Data Center, contact Melissa Banzhaf. For more information about U.S. Census Bureau Research Data Centers, and the Atlanta Census Research Data Center in particular, see here.

Update: Hat tip to Jim Spletzer at the Bureau of Labor Statistics, who pointed me to this paper by E.J. Reedy and Bob Litan, which was published by the Kauffman Foundation in July. Reedy and Litan show similar patterns in the aggregate BLS and BDS data, as I do, and also demonstrate that the shrinking size of new establishments is not made up for in later life. New firms are getting smaller on average and tend to stay smaller over their life. They posit as explanations increased firm-level productivity and shifting occupational needs related to increased use of information technology and increased globalization.

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

August 18, 2011 in Employment, Small Business | Permalink


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You are a senior economist and don't understand the long term trend from skilled labor to automation? Or the capital required in today's business landscape small or large?
Try starting a consumer driven business that requires access to store shelves? or B to B calling on any major corporation that requires extensive ISO documentation along with bidding against better capitalized competitors. Internet driven E-bay style companies are mostly what is happening in small business otherwise the capital requirements far exceeds what most Americans can risk.
I am retired from a career in manufacturing that started in the early 70's and have experienced first hand the country's changing business and labor market.

Posted by: Ron Caldwell | August 19, 2011 at 11:09 AM

I would like to comment on this previous post. I think one must consider all of the so called independent contractors working as freelancers that are paid by the job not by the hour this situation is ripe for abuse. This could be destorting the jobs picture.

Posted by: dennis the menace | September 06, 2011 at 02:55 PM

I think you have hit the nail on the head here. Newer small establishments are able to stay more focused on a particular sector and make decisions quicker without all the redtape of a larger organization.

Posted by: Recruitment Agencies Auckland | December 20, 2011 at 03:05 PM

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June 27, 2011

Stimulating small business activity: Still a struggle

In testimony before Congress on June 22, U.S. Treasury Secretary Timothy Geithner laid out the disproportionate effect the financial crisis has had on small businesses and particularly their ability to raise funds:

"The banking and credit component of the economic crisis was especially damaging for small businesses, which are more dependent on bank loans for financing than are larger firms. Alternative forms of financing, through household credit via mortgages and credit cards, were also deeply compromised by the financial crisis. Mortgages and other loans account for four times the share of liabilities for non-corporate businesses as they do for corporate businesses. Total lending to non-financial businesses shrank for nine straight quarters starting in the fourth quarter of 2008, before turning slightly positive in the first quarter of 2011; on net, lending has declined by a cumulative $4.2 trillion since Fall 2008. Over the same period, larger businesses were able to raise $3.6 trillion by issuing debt securities."

Evidence from the Atlanta Fed's latest small business finance poll of approximately 182 firms in the Southeast confirms that many firms are still struggling with financing. Total financing received among repeat poll participants edged up only slightly in the first quarter of 2011 from the previous quarter. Further, 43 percent of participants overall reported that tighter lending practices are hindering access to credit. In addition, when offers of credit do occur, they often do not materialize into loans as a result of the unfavorable credit terms being offered. In fact, 41 percent of applications to community and regional banks and 57 percent of applications to large national banks were refused by the borrower, according to the first quarter poll.

In response to these ongoing problems, the Administration has created several programs to help small business obtain funding. One is the Small Business Lending Fund (SBLF). Created by the Small Business Jobs Act in September 2010, the fund began accepting applications in December 2010. The SBLF was set up to provide an incentive for financial institutions with less than $10 billion in assets (mostly community banks) to boost lending to small businesses.

Under the terms of the program, the more small business lending increases, the greater the benefit to the institution. In theory, shoring up the balance sheets of the banks in exchange for an increase in small business lending would result in an increase the amount of loanable capital. Further, there would be a greater opportunity cost for failing to bring loans to closure, and this cost could result in borrowers receiving more appealing credit terms. As a result, those small businesses currently rejecting loans based on the cost of funds could see credit terms ease, resulting in more acceptances and an expansion of small business loans. (You can read more about the details of the SBLF here.)

Unfortunately, the program, which closed out June 22, was not very popular. As of the morning of June 22, the Treasury had received 869 applications out of 7,700 eligible lenders. All together, they requested only $11.6 billion out of a possible $30 billion from the program.

Why was participation so low? One potential reason is lack of demand. According to Paul Merski, chief economist and executive vice president of the Independent Community Bankers of America, "You're not going to pull down capital unless you have loan demand."

If demand for small business loans is not expected to pick up, then what is restraining demand?

One possibility that we considered in a macroblog about a year ago is that demand is being restrained as a result of the perception of tight credit supply. Creditworthy borrowers could be assuming they will be denied so they are not applying. Another possibility is that demand is constrained because of economic weakness. To get a handle on the extent to which these factors are restraining demand, we turn back to our small business finance poll. In the poll, we ask those who did not seek credit in the previous three months why they didn't seek it. The chart below shows the responses to the question. (Note that survey participants can check more than one option.)

At first glimpse none of the reasons seem to dominate. However, if we categorize the responses into "I didn't need credit" and "I didn't think I'd able to get credit," the graph becomes a little more useful.

The graph below shows the responses placed into these two categories (where possible). Firms that only marked "sales/revenue did not warrant it," "sufficient cash on hand," or "existing financing meets needs" are put into the "I didn't need credit" category. Meanwhile, firms that only said "unfavorable credit terms" or "did not think lenders would approve" fall under "I didn't think I'd be able to get credit."

We do not claim that our survey is a statistically representative sample, and we of course can only reach existing businesses. The survey is silent on potential new businesses that were not formed because of credit issues that the SBLF could potentially address. With those caveats, we do find that the majority of firms (66 percent) did not borrow because they didn't need to or want to. Whatever the merits of the SBLF program, it appears that understanding why those businesses that are fully capable of expanding are not doing so is at least as important as understanding the slow pace of SBLF activity.

Ellyn TerryBy Ellyn Terry, an analyst in the Atlanta Fed's research department

June 27, 2011 in Small Business | Permalink


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Banks and businesses large and small are stuffed to the gills with cash. Two things that could induce them to spend it are: rising inflation and rising interest rates. Two things the central bank fights hardest to do: hold down inflation and flatten rates to zero as far into the future as possible.

Posted by: Carl Lumma | June 28, 2011 at 11:27 PM

It is the community banks in this country that better serve small businesses. They are important customers at our small banks.
The SBLF will probably only disburse about $2 to $3 billion of those funds because of dividend restrictions imposed on many community banks by the federal reserve as a result of the economic crisis.
SBLF could make a difference because it hits home. Rigth were small businesses need it, at their local community bank.
If you have a business with revenues less than $1mm per year you are not an important customer at the larger banks and they will not assist during this recession.

Posted by: carlos safie | June 29, 2011 at 07:17 AM

Rising inflation can only induce someone to spend money IF they were predetermined to "want" the item, or investment, prior to the bout of inflation. If I "wanted" to buy a new car that costs $20,000 but did not "need" the new car, please explain why the car suddenly costing $25,000 would prompt me to rush out and spend my capital on it? I would assert that it wouldn't. Rising inflation on investment opportunities in fact makes the investment opportunity less compelling not more.

The same holds true for rising interest rates. Rising interest rates only prompts would be borrowers to rush out and secure debt financing if they "wanted" it before the interest rate increases. If they didn't "need" debt financing before, they sure don't perceive themselves as needing debt financing when it is more expensive.

Business small and large have become increasingly risk averse. Debt financing for ANYTHING makes a business riskier not less. I would also assert that debt financing for existing operations adds very little (if any) value to the business. Debt financing for new capital projects CAN add value to the business BUT it also increases risk to the business. Thus, in a world of more risk aversion there is naturally less demand for loans a.k.a. leverage.

The underlying secret that is spreading among businesses is that the "just add leverage" American way is not a sound business strategy. Many businesses of all sizes have caught on to this fact. They seem to only be considering taking out debt financing if they "need" it.

In my opinion a tremendous factor in the increase in risk aversion is the outrageous cost of failure that has only been increasing over the past 30 years. Ironically this is largely because of inflation. Most start-up businesses cannot afford healthcare for their owners or employees. Start-ups initially struggle to provide enough cash (let alone income) to provide for food, transportation, technology, etc. This is only worse when the entreprenuer has a family...as he or she is obligated to provide for other people. So, not only will the start-up struggle to provide for their family...in the event it goes under they will be facing tremendous losses, increased costs through bankruptcy issues, AND they will STILL be obligated to provide for their family (with less resources).

Even a less extreme case...lets just say I wanted to go back to graduate school to secure a better job in a different field or start my own business after school. I will have to take out a student loan that cannot be dissolved EVER and is typically required to be paid back in 10 years (as I understand it). That is potentially over $100,000 in debt that, in the event things don't pan out well, will be a plague for the rest of my life. Repeat the same process of not being able to provide the basic necessities of life such as food, clothing, healthcare, shelter, etc. to my own family and hopefully you will get my point.

You want to increase small business activity? Stop trying to engineer inflation...and reduce the cost of failure to those with a good idea and the drive contribute to society by creating their own business! At least that is my idea for the moment.

Thanks for your time and have a happy 4th of July.

Posted by: Danny | June 30, 2011 at 05:02 PM

We are finding that it difficult to force businesses to borrow money. The main reason a small business wants to borrow is if they see demand expanding for their goods or services. If small business owners don't see demand rising for their products, they will NOT want to take on MORE risk by borrowing. Low interest rates, gov't programs, tax credits, lower taxes, and a plethora of other programs will NOT make a difference. It will not encourage small businesses to borrow.

The problem may be very complex, but the widening income gap in the U.S. has to be part of this issue. If the average consumer has a smaller share of the economy, then it stands to reason that their consumption percentage of the economy will be lower.

The trickle down theory that Republicans seem to be wedded to, will only result in the U.S. economy trickle down the list of vibrant economies.

The great economic expansion that we have enjoyed from the 50s through the 90s was directly attributed to the rise of the middle class and their increasing share of the U.S. economy. If politicians want to reinvigorate the economy, perhaps they should consider how our national income and taxes are distributed throughout our society.

Posted by: mattinmanhattan | July 02, 2011 at 09:46 AM

It is not that I disagree with the idea that "demand" comes before investment or at the very least concurrently, but in fact it is the disingenuous efforts of politicians to use the notion that demand comes first to waste hundreds of billions of dollars on unproductive crap that is in reality designed to do little more than help them win election. At the core, state capitalism works the same way the private enterprise system works if either are to succeed: over the long run both have to make investments that are at best profitable or at worst economically feasible. In the U.S. we happen to be cursed with politicians who do not have the personal responsibility or accountability or historical track record (in the past 20 years) of making such decisions. Thus, many people find the notion of the free market system far superior to that of state run enterprise.

On the wealth gap. I have started to ponder a new notion of the origin of the existence of a wealth gap which has been expanding in the past 20 years. Presently I believe that the disparity between the middle class and the upper class stems from poorly constructed rules, regulations, and incentives. In a world in which the government can craft "perfect" rules/regulation the chances of wealth creation are reasonably fair between the economic classes. Yes there are probably disparities that still exist, but from 1950-1990 there are countless examples of rags to riches or probably even more plentiful rags to a great middle income lifestyle. In the world with perfect regulation income becomes more of a function of true work ethic.

However, in a world of less than perfect regulation...there is an arbitrage that takes place between the better mentally equipped, and financially backed people, and the middle income or poorer classes of people. Quite simply the vast majority of the brain power (which is a minority of people) invests the majority of time determining how they can make the most money in a relatively easy fashion. Why do you think there are SO many terrible lawyers in the world?

Having imperfect rules to the game isn't the only ingredient to an expanding wealth gap. A general decline in morality has to occur as well. It is not enough to have the opportunity to screw other people for money but rather you have to have the desire to do it as well. It doesn't have to be necessarily malicious. It can simply be as easy as a doctor who charges different rates depending on what insurance provider you use. While I am sure there are rules against such a thing, try to keep a straight face and say it doesn't happen on a WIDE scale. Bet you can't do it.

What we need in my estimation is to stop trying to craft the perfect regulation. Begin re-incorporating ethics/morality/human interests into the classroom and probably most importantly the business, legal, medical and any other professional classroom. Sure there have been significant increases in ethics topics in classrooms but I would assert those too are primarily focused on the letter of the law and not the spirit of it...which I would argue is "don't try to screw other people for a living".

Imagine a world where businesses, individuals, and politicians made decisions for their own self interests BUT made a conscience effort to align their self interests with that of society as a whole?

Don't make it so easy on the rich to keep getting richer. They are smarter than you or I. Make it easier for the middle income or poor people with a good idea to experience manufacturing and monetizing that good idea. Just some additional pennies of my thoughts.


Posted by: danny | July 06, 2011 at 09:57 PM

The great economic expansion that we have enjoyed from the 50s through the 90s was directly attributed to the rise of the middle class and their increasing share of the U.S. economy.

Posted by: small business web design | October 11, 2011 at 01:12 AM

I especially like the comment where you stated "If demand for small business loans is not expected to pick up, then what is restraining demand?". Very good point indeed.

Jeffrey Lynne

Posted by: Jeffrey Lynne | January 29, 2012 at 05:39 PM

Middle classes have to struggle a lot to keep pace with the today's advancement. There are a lot of job opportunities created for them due to economic development. But it isn't a stable situation.

Posted by: engineering resume | July 07, 2012 at 11:01 AM

I don't know if they have any more tricks up their sleeves to defrost the credit markets. I don't know a lot of small businesses successfully getting small business loans.

Posted by: John Walters | July 13, 2012 at 11:10 PM

After the huge recession a number of small business including large business ventures are lost its shines due to lack of funding and outputs, as small business are totally depend upon bank loans for their funding therefore they are severely effects during the period of recession.

So in response to save the small business banks are really played an essential role in the developing process.

Posted by: Tim Swager | October 26, 2012 at 08:26 AM

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March 30, 2011

A disturbing trend: No growth in total business establishments in U.S.

The last Atlanta Fed poll of small businesses in the Southeast suggested an uptick in confidence late last year. A similar upturn has been noted in the National Federation of Independent Business's survey of its members conducted in February of this year and released in March. This upturn is good news for the U.S. economic outlook, as small firms are one group that has lagged the economic recovery.

It's also good news, given the continuation of unimpressive readings from last week's release of the Quarterly Census of Employment and Wages (QCEW) for the second quarter of 2010. As we have noted previously and highlighted in this recent Wall Street Journal blog post,

"The recession caused a sharp decline in new business start-ups, intensifying job market losses and potentially putting future economic growth at risk."

The QCEW data also showed that the number of business establishments with payrolls in the United States has remained stuck at around 9 million since late 2007. By comparison, in the early 1990s there were about 6.5 million establishments, a number that rose to close to 8 million in 2000 before peaking at 9 million 2007.

The net creation of business establishments—that is, physical locations for conducting business such as manufacturing plants, retail stores and business offices—has in the past been a key ingredient in job growth in the United States. This growth is driven partly by demand from newly created businesses and by mature firms expanding their footprint by opening additional locations. The demand for physical space is also clearly important to the commercial real estate industry, which has been burdened by elevated vacancy rates in many markets and generally low demand for new space.

Another trend from the QCEW data is striking—the number of employees per establishment is much lower than it used to be. The average size of U.S. establishments was relatively stable during the 1990s, at around 16.5 employees per physical location. The 2001 recession was associated with a decline in the average size to about 16 workers per establishment, and the average size continued to track lower during the last decade, moving down to about 15 employees per establishment in 2007. The latest reading for the second quarter of 2010 was 14.3 workers per establishment, up from 14 workers in the first quarter.

Several possible explanations exist for these declines in average establishment size. First, there is a cyclical response to weak demand as firms cut their payrolls. Second, productivity gains over time allow a plant, store, or office to support the demand for its goods or services with fewer workers. Third, there is a secular trend away from industries that have a large average establishment size, such as manufacturing.

If one digs into the data, only one major sector has experienced a rise in average employment per location over time—health care. This growth is likely a result of increased demand for health care services, and those services are primarily embodied in the staff at doctors' offices and hospitals. Manufacturing, on the other hand, has witnessed dramatic declines in average plant size. During the 1990s, average plant size was relatively stable at around 43 workers. The average size then declined to about 38 workers following the 2001 recession and remained around that level through 2007 before declining again and reaching an average size of 33 workers per plant in the second quarter of 2010. This trend appears to primarily reflect a combination of secular shifts away from labor-intensive types of manufacturing where productivity gains have already played out—some apparel manufacturers, for instance—and sharp cyclical downturns.

Of course, something will have to give if there is employment growth—primarily more and/or larger establishments. Consider the following thought experiment: if the average size of establishments returns to the prerecession level of 15 workers per location, and private-sector jobs are added around a pace of 2.4 million a year pace (or 200,000 jobs a month), then we would see establishment growth return to the 1992–2007 average of about 160,000 per year. Clearly, we are currently far below that trend.

Photo of John Robertson By John Robertson
Vice president and senior economist in the Atlanta Fed's research department

March 30, 2011 in Employment, Real Estate, Small Business | Permalink


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I'm not sure we'll ever go back to what we were before. Our productivity has to be exploding, so fast now that it can't be captured for some time. When MS windows came out, it took many years to transform how we do business. But, transform it did. well, that same process is happening again but this time the number of years to transformation should be much shorter.

Posted by: FormerSSresident | April 01, 2011 at 12:54 AM

Hi John,

You can really can see the significance of the decline due to recession. At least it has bottomed out.

Posted by: Intrinsic Value | April 01, 2011 at 06:25 AM

"If one digs into the data, only one major sector has experienced a rise in average employment per location over time—health care. This growth is likely a result of increased demand for health care services"

Or, actually, the much more likely (and obvious - if not politically permissible) result of the vast, superficial "subsidizing" of health care - one that has resulted in a grotesque misallocation of capital, the warping of the macroeconomy, and a decades-long medical uber-inflation which (along with academic tuition inflation) is treated by government insiders as though it is some sort of inexplicable "mystery".

As opposed the political payola and bribery it so clearly is.

Posted by: csa721 | April 03, 2011 at 11:58 AM

Looking at that chart of business establishments makes me wonder even more about the point of the Birth Death model. If it's supposed to take into account the birth and death of new businesses, then why did it ever add all those jobs on a monthly basis. The data is clear that new business formation simply hasn't been happening for years.

Posted by: apj | April 05, 2011 at 05:43 AM

The culture of fear and uncertainty, higher energy costs and open political/media hostility towards business doesn't help.

If you are a venture capitalist, angel investor or entrepreneur is this likely to cause you to think startup?

Why should you?

Posted by: Army of Davids | April 23, 2011 at 02:54 PM

I find it funny how these results contradict each other, companies are just finding new ways to cut costs, and that normally means cutting employees

Posted by: Best virtual office | November 02, 2011 at 01:50 AM

I'm with Best, these types of results are always contradictory. Businesses are boosting profits by cutting employees. That is not sustainable.

Posted by: Penny Stocks | November 03, 2011 at 06:02 PM

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