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Sources of Job Churn in Minnesota

by Mustapha Hammida
July 2014

The Minnesota labor market regularly experiences a significant amount of job creation and destruction. In 2012 employers reallocated about 300,000 jobs on average each quarter, according to the Minnesota Business Employment Dynamics. This is a natural outcome of the employers' demand for and employees' supply of labor continuously interacting with each other to create or terminate jobs. Jobs are created as firms expand, open as a startup, or reopen after a short closure. Conversely, jobs are terminated as firms contract, close for good, or close for a temporary duration. However, little is known about how these forces drive job creation and destruction in Minnesota.1. This article seeks to fill this gap by investigating the distributions of job creation and destruction at the state level and across industries.

The analysis is based on statistics from the Minnesota Business Employment Dynamics (MBED). These statistics, produced each quarter with the cooperation of the U.S. Bureau of Labor Statistics, measure the number of jobs added at expanding and opening businesses and the number of jobs lost at contracting and closing businesses. The BED statistics are constructed2. from the Quarterly Census of Employment and Wages (QCEW) by linking employment data at the third month of each calendar quarter at each business or establishment. The QCEW compiles all businesses subject to Minnesota Unemployment Insurance (UI) and covers more than 97 percent of Minnesota employment. Comparing employment levels between a particular quarter, referred to as current quarter, and the quarter preceding it give rise to five types of businesses: expanding, opening, contracting, closing, and stable.

Definitions:

  • An establishment is an economic unit that produces goods and services, generally a single physical location with a specific industry classification, such as a factory or store.
  • Employment is the number of UI-covered workers who received wages during the period that includes the 12th of the third month of each quarter.
  • An expanding establishment is an establishment that expands its quarterly employment from a positive level in the previous quarter to a higher level in the current quarter.
  • An opening establishment is an establishment that expands its quarterly employment from zero in the previous quarter to a positive level in the current quarter.
  • The sum of jobs added at expanding and opening establishments is defined as gross job gains, which capture job creation.
  • A contracting establishment is an establishment that reduces its quarterly employment from a positive level in the previous quarter to a lower level in the current quarter.
  • A closing establishment is an establishment that reduces its quarterly employment from a positive level in the previous quarter to zero in the current quarter.
  • The sum of jobs lost at contracting and closing establishments is defined as gross job losses, which capture job destruction.
  • A stable establishment is an establishment that holds its quarterly employment constant in the previous and current quarters. Although these establishments don't contribute to gross job flows, counting them as well as their employment levels is important to determine the total number of establishments and total employment and consequently to express the MBED statistics in terms of rates.

Gross job gains and gross job losses at the state level

Table 1 presents the seasonally unadjusted gross job gains and losses for Minnesota in the third quarter of 2013, the most recent MBED statistics available. These MBED statistics reveal many salient characteristics of the Minnesota labor market and the distributions of job creation and destruction. First, the magnitudes of job creation and job destruction are significantly larger than the net employment change. Gross job gains were 128,055 jobs and gross job losses were 149,482 jobs, which together contributed to a negative net employment change of 21,427 jobs on a seasonally unadjusted basis. Viewed differently, the drop of 21,427 in employment levels between June and September 2013 is a net product of a job churn of 277,537 jobs that were either created or terminated.

We obtain the same conclusion when considering these measures expressed in relative terms. While the negative net employment change was barely 1 percent of total employment, gross job gains and gross job losses represented 4.7 percent and 5.5 percent of total employment, respectively. This means that 4.7 percent of jobs in September 2013 were not there in June 2013, and 5.5 percent of jobs that were there in June 2013 disappeared in September 2013. Adding these two rates together indicate that job reallocation accounted for 12.2 percent of total employment between June and September 2013. Ten of every 82 jobs were either created or terminated.

Second, expanding establishments dominate gross job gains or job creation. Of the 128,055 gross job gains between June and September 2013, 111,151 jobs or 86.8 percent were added by expanding establishments while only 16,904 jobs or 13.2 percent were added by opening establishments. And in relative measures, gross job gains from expanding establishments amounted to 4.1 percent of total employment, while gross job gains from opening establishments were only 0.6 percent of total employment.

Third, contracting establishments dominate gross job losses or job destruction. During the third quarter of 2013, contracting establishments shed 132,515 jobs or 88.6 percent of gross job losses, and closing establishments eliminated 16,967 jobs or 11.4 percent of gross job losses. In relative terms, gross job losses at contracting establishments accounted for 4.9 percent of total employment compared to 0.6 percent of total employment at closing establishments.

Fourth, the net employment change in third quarter 2013 was driven mainly by the net change of employment between expanding and contracting establishments. Recall that net employment change is the difference between gross job gains and gross job losses from all establishments. We can redefine the overall net employment change by breaking it into two parts: (1) the difference of gross job gains at expanding establishments and gross job losses at contracting establishments and (2) the difference of gross job gains at opening establishments and gross job losses at closing establishments. Table 1 shows that gross job gains at opening establishments and gross job losses at closing establishments offset each other at roughly 17,000 jobs. Specifically, the net employment change resulting from job creation at opening establishments and job destruction at closing establishments was tiny, a loss of 63 jobs statewide. On the other hand, the difference of gross job gains at expanding establishments and gross job losses at contracting establishments was a loss of 21,364 jobs which is almost all of the overall net employment loss of 21,427 jobs.

Moreover, inspecting these net employment changes expressed in percent of total employment reveals this result even more clearly. The overall net employment change was -0.8 percent between June and September 2013. This is exactly the value we obtain from the difference of gross job gains of expanding establishments (4.1 percent) and the gross job losses of contracting establishments (4.9 percent). This means that the net employment change resulting from opening establishments and closing establishments was basically zero percent of total employment. In fact, the rates of gross job gains from opening establishments and gross job losses from closing establishments were each 0.6 percent, therefore cancelling out each other.


Table 1

Gross Job Gains and Losses, Minnesota, All Employment,
Quarter Ending September 2013

Business Employment Dynamics Statistics

Jobs

Rate (%)

Gross job gains

128,055

4.7

Expanding establishments

111,151

4.1

Opening establishments

16,904

0.6

Gross job losses

149,482

5.5

Contracting establishments

132,515

4.9

Closing establishments

16,967

0.6

Net change

-21,427

-0.8

Source: Minnesota Department of Employment and Economic Development, MBED Program


Gross job gains by industry

The overall distributions of job creation and job destruction are certainly influenced by many factors such as establishments industry, geographic location, size, and age, to mention a few. This article considers only industry. Chart 1 shows a significant amount of heterogeneity in gross job gains across industries for each establishment type: all establishments, expanding establishments, and opening establishments. Overall, gross job gains varied significantly across industries, from a high of 14,105 jobs in the Retail Trade industry to a low of only 218 jobs in the Mining industry. Likewise, the gross job gains of expanding establishments were widely spread across industries. Over three-fifths of gross job gains at expanding establishments were at six industries, each with more than 10,000 jobs created. These industries are: Administrative, Support, Waste Management and Remediation Services, Health Care and Social Assistance, Retail Trade, Educational Services, Construction, and Accommodation and Food Services. At the lower end, we find that expanding establishments at Utilities and Mining industries had gross job gains of only 242 and 205 jobs, respectively.


Chart 1


Like expanding establishments, the opening establishments had gross job gains that were significantly different across industries. Opening establishments at Accommodation and Food Services, Retail Trade, and Construction industries contributed 47 percent, or 7,907 jobs, of all gross job gains at opening establishments. An additional 15 percent, or 2,588 jobs, were added by opening establishments in Health Care and Social Assistance industry and in the Professional, Scientific, and Technical Services industry. In each of the 15 remaining industries, opening establishments had gross job gains smaller than 1,000 jobs, with the lowest levels generated at Management of Companies and Enterprises, Utilities, and Mining industries with gross job gains of 92 jobs between them.

Although industries differed in the magnitudes of gross job gains from expanding and opening establishments, we find that gross job gains from expanding establishments dominate gross job gains in all industries. Chart 1 gives the share of gross job gains of opening establishments in all gross job gains by industry.3. The highest level of this share was 25.2 percent in Accommodation and Food Services industry. This also means that in Accommodation and Food Services industry expanding establishments accounted for 74.8 percent of all gross job gains. The second highest share of gross job gains from opening establishments was 21.6 percent in Arts, Entertainment, and Recreation industry. Marching down the distribution, the smallest share of gross job gains from opening establishments was 4.7 percent in Management of Companies and Enterprises industry. In other words, almost all gross job gains in Management of Companies and Enterprises industry were from expanding establishments, 95.3 percent. In fact, gross job gains from expanding establishments in this industry were 1,078 jobs compared to 53 jobs from opening establishments. Thus, expanding establishments seem to play a more significant role in job creation than opening establishments in all industries, generating at least three-fourths of jobs created in each industry.

Extending this analysis to the relative measures of gross job gains yields similar findings. First, as Table 2 shows, the rates of gross job gains in total employment for expanding and for opening establishments varied significantly across industries. Among expanding establishments, the rate of gross job gains was as high as 13.4 percent in Agriculture, Forestry, Fishing, and Hunting and as low as 1.4 percent in Management of Companies and Enterprises. Looking at opening establishments, their rate of gross job gains varied as well across industries, but the range of variation was much narrower than that of expanding establishments. The highest rate of gross job gains at opening establishments was 1.6 percent in both Construction and Accommodation and Food Services and the lowest rate was 0.1 percent in Manufacturing and in Management of Companies and Enterprises.

Second, Table 2 also shows that the rate of job gains from expanding establishments is much greater than the rate of job gains from opening establishments in all industries. For example, in Manufacturing the rate of gross job gains for expanding establishments was 2.7 percent of total employment while for opening establishments it was 0.1 percent of total employment. In all industries, expanding establishments were the major drivers of gross job gains between June and September 2013.


Table 2

Percent Distribution of Gross Job Gains and Losses by Establishment Type and Major Industry,
Minnesota, 2013 Q3

Industry (2-digit NAICS code)

Gross job gains

Gross job losses

Expansion

Openings

Total

Contracting

Closings

Total

Agriculture, Forestry, Fishing, and Hunting (11)

13.4

1.4

14.8

14.2

1.2

15.4

Mining (21)

3.2

0.2

3.4

4.0

0.0

4.0

Utilities (22)

1.7

0.2

1.9

1.4

0.2

1.6

Construction (23)

9.2

1.6

10.8

6.5

1.3

7.8

Manufacturing (31)

2.7

0.1

2.8

2.9

0.3

3.2

Wholesale Trade (42)

2.8

0.6

3.4

4.3

0.7

5.0

Retail Trade (44)

4.0

0.8

4.8

5.2

0.6

5.8

Transportation and Warehousing (48)

5.7

0.6

6.3

3.7

0.8

4.5

Information (51)

2.7

0.4

3.1

3.0

0.4

3.4

Finance and Insurance (52)

2.1

0.2

2.3

2.7

0.4

3.1

Real Estate and Rental and Leasing (53)

3.4

0.7

4.1

4.3

1.1

5.4

Professional, Scientific, and Technical Services (54)

4.0

0.9

4.9

4.1

1.3

5.4

Management of Companies and Enterprises (55)

1.4

0.1

1.5

2.5

0.1

2.6

Administrative, Support, Waste Management and Remediation Services (56)

8.5

0.5

9.0

5.6

0.7

6.3

Educational Services (61)

5.2

0.3

5.5

8.9

0.6

9.5

Health Care and Social Assistance (62)

2.6

0.3

2.9

2.7

0.3

3.0

Arts, Entertainment, and Recreation (71)

5.1

1.4

6.5

11.1

0.9

12.0

Accommodation and Food Services (72)

4.7

1.6

6.3

6.7

1.1

7.8

Other Services (except Public Administration) (81)

5.4

1.0

6.4

6.4

1.3

7.7

Public Administration (92)

2.2

0.2

2.4

5.9

0.1

6.0

Source: Minnesota Department of Employment and Economic Development, MBED Program


Gross job losses by industry

Gross job gains captures one part of the job dynamics; the other part is gross job losses. Chart 2 displays gross job losses from contracting establishments and closing establishments across industries. It is evident from looking at of Chart 2 that the distributions of gross job losses show features that are similar to those of the distributions of gross job gains. First of all, gross job losses have a large degree of heterogeneity across industries. The highest level of gross job losses was the 20,567 jobs lost in Educational Services, while the lowest level was only 237 jobs in Utilities. Peeking into gross job losses by source, the heterogeneity is also apparent. Contracting establishments generate the widest variation in gross job losses as they varied from a high of 19,333 jobs in Educational Services to a low of 206 in Utilities. The gross job losses at closing establishments were also variable across industries, varying from 2,575 jobs in Accommodation and Food Services to no jobs lost in mining.


Chart 2


This variation among industries has a natural consequence; gross job losses tend to be concentrated in a handful of industries. About 47 percent of gross job losses at contracting establishments were in four industries: Educational Services, Accommodation and Food Services, Retail Trade, and Health Care and Social Assistance. Contracting establishments in these industries contributed 61,751 jobs to gross job losses, of which 19,333 jobs were in Educational Services alone. The significant amount of gross job losses in education between June and September 2013 seems to be the result of reducing employment in elementary and secondary schools as they moved into summer months. In fact, the gross job losses of contracting establishments in these schools were 15,352 jobs or 79 percent of gross job losses at contracting establishments in Educational Services

By analogy to contracting establishments, gross job losses from closing establishments were also concentrated in few industries. Of the 16,697 gross job losses from all closing establishments 7,652 or 45 percent were in Accommodation and Food Services, Professional, Scientific, and Technical Services, Retail Trade, and Construction. Two other industries contributed an additional 2,505 jobs or 15 percent to gross job losses from closing establishments. Thus, three-fifths of gross job losses from closing establishments were in these six industries.

Chart 2 reveals that the distributions of gross job losses bear another common feature with those of gross job gains. By analogy with gross job gains from expanding establishments dominating gross job gains in all industries, gross job losses from contracting establishments dominate gross job losses in all industries. Chart 2 gives the share of gross job losses from closing establishments in total gross job losses by industry.4. The largest share of closing establishments in gross job losses was a modest 24.7 percent in Professional, Scientific, and Technical Services. In other words the share of contracting establishments was 75.3 percent, and that is the lowest of all industries. Only one other industry, Real Estate and Rental and Leasing, had a share of closing establishments in gross job losses barely above 20 percent. The lowest shares of closing establishments in gross job losses were in Management of Companies and Enterprises (2.5 percent), Public Administration (1.2 percent), and Mining (0 percent). In these three industries almost all of gross job losses occurred at contracting establishments.

The discussion so far emphasized absolute measures of gross job losses. One direction of generality is to consider relative measures of gross job losses. Table 2 gives the percent distributions of gross job losses in total employment for contracting and closing establishments. As obtained with absolute measures above, the ratios of gross job losses to employment for both contracting and closing establishments exhibit significant heterogeneity across industries. The ratio of gross job losses to employment for contracting establishments was highest at 14.2 percent in Agriculture, Forestry, Fishing, and Hunting and lowest at 1.4 percent in Utilities. Contracting establishments in Educational Services which have the largest number of gross job losses is now the third largest with a ratio of gross job losses to employment of 8.9 percent.

Similarly, the ratio of gross job losses to employment for closing establishments varied across industries, albeit over a smaller range compared to that seen with contracting establishments. The highest rate of gross job losses to employment for closing establishments was 1.3 percent in Professional, Scientific, and Technical Service, Other Services, and Construction. And as expected, the lowest rate of gross job losses to employment for closing establishments was zero percent in Mining.

Finally, Table 2 indicates that contracting establishments play a more important role in generating gross job losses than closing establishments in all industries. In Manufacturing the rate of gross job losses for contracting establishments was 2.9 percent of total employment, while for closing establishments it was only 0.3 percent of total employment. This means that between June and September 2013 more than 90 percent of gross job losses in Manufacturing came from contracting establishments.

Summary:

Gross job gains or job creation and gross job losses or job destruction are significant and occur simultaneously in the Minnesota labor market. Between them, they reached close to 278,000 jobs between June and September 2013. Most of the job creation in the state and by industry was generated by expanding establishments, and likewise most of the job destruction was generated by contracting establishments. Moreover, heterogeneity across industries characterized all distributions of gross job gains and gross job losses by type of establishment. It is likely that the extent and magnitude of these heterogeneities across industries is time-dependent. The results of this analysis are pertinent to the third quarter time period. Job dynamics from other quarters of the year might yield different results. Extending this analysis to each of the other quarters will improve our understanding of how job creation and destruction evolve over a calendar year.



1For a discussion on Minnesota job creation and job destruction see research previously published by this author in DEED's Employment Review of May 2012.
2For a detailed discussion on how the BED statistics are developed visit: www.bls.gov/bdm/
3The share of gross job gains from expanding establishments expressed in percent can easily be obtained by subtracting from 100 percent the gross job gains from opening establishments in each industry.
4The share of gross job losses from contracting establishments expressed in percent can easily be obtained by subtracting from 100 percent the gross job losses from closing establishments in each industry.

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