Thursday, November 17, 2011

Unemployment: Due to Lack of Domestic Expansion, Not Layoffs

The BLS released their latest Business Employment Dynamics report that breaks out positive change in employment (by expansions and new business openings) and negative change in employment (by contractions and business closings). The data lags a few quarters so it is not very good for looking at short-term trends, but the long-term trend is quite interesting.

The first chart outlines each component, which I then normalized by population to get an apples to apples comparison over the years. What may be surprising is that the negatives (contractions and closings) have actually come down as a percent of population over the past few decades (in fact there has been a huge "contraction in contractions" recently). The bad news is that the level of expansions and openings are down (by an even larger amount) over that time frame.


The next chart compares expansions vs contractions (i.e. existing business employment dynamics) and openings vs closings (i.e. new business employment dynamics). From the below chart we can see that the largest contributor to (the lack of) job growth has been existing business dynamics (though a long-term decline of new businesses have likely played a role in the lack of expansion hiring).



Taken together, we can summarize the charts as follows:
  • Layoffs via contractions and closing may be less of an issue (than at least I thought)
  • There has been a decline in new business employment over the past few decades
  • The lack of expansionary hiring (and negative expansionary "shocks" during the last two recessions) seems to be the the likely reason we are facing high unemployment
The issue we face is that the lack of expansionary hiring among businesses is structural in nature. As I've detailed before, the shift in hiring by existing businesses from the U.S. to overseas has played a huge role (the example of China is shown here). The good news is that policy may be able to fix some of this, either through incentives for new business development and/or shifting employment back to the U.S. (the latter of which I expect targeted policy at some point, regardless of the kicking and screaming by pro free-trade economists and corporations).

Source: BLS