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Measures of Employment Turnover post 2000: Gross Employment Gains and Losses Versus Net Employment Change
By Anne-Marie Rollin
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This article in the Economic Insights series decomposes business-sector annual net employment growth into gross employment creation and gross employment destruction at the firm level. It is based on research carried out by Statistics Canada on the topic of business dynamics.
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The net employment created or destroyed in the business sector in a given year provides only a partial picture of the employment change constantly taking place at the firm level. Some firms shrink or go out of business even during expansions, while other firms appear or expand even during recessions. This paper studies employment dynamics in the business sector during the period 2001 to 2009.
This period includes an expansionary phase (2001 to 2008) and a recession (2008/2009). Business-sector employment grew by 1.8% annually on average between 2001 and 2008, and fell by 3.2% in 2009.
Firm-level data can be used to decompose net employment growth into gross employment creation (employment created by entering and expanding firms) and gross employment destruction (employment destroyed by exiting and contracting firms). This provides a picture of the amount of employment churning that occurs on a continuous basis in the business economy. It can also serve to detect structural changes taking place and the competitive processes at work in the economy.
Employment creation and destruction
The employment created by some firms and the employment destroyed by others annually dwarf the net employment growth number (Chart 1). Total employment varied by less than 4% each year, but employment creation and destruction rates both exceeded 8%.
During the expansionary phase of the decade, employment creation and destruction both trended downward, though the decrease in employment destruction was steadier. The annual change in the rate of net employment growth can come from a change in employment creation, a change in employment destruction, or both. From 2001 to 2004, the fluctuations in employment creation contributed largely to the evolution of net employment growth. However, lower employment destruction rates led to an increase in the net employment growth rate between 2005 and 2007. As is typical during a recession, employment destruction increased markedly (+3.5%) in 2009 while employment creation slowed (-1.6%). As a result of the financial crisis, the business sector in Canada employed approximately 369,000 fewer individuals in 2009 compared to 2008.
Employment reallocation, the sum of gross employment creation and gross employment destruction, provides a summary measure of the reshuffling of employment opportunities across firms. During the expansion, employment reallocation decreased steadily, to 20.1% in 2008 from 25.7% in 2001 (Chart 2). This means that one in four jobs was either created or destroyed in 2001, whereas employment reallocation affected one in five jobs in 2008. The business-sector labour market was therefore less dynamic in a sense towards the end of the expansion. Such downward trend has also been observed in the United States over the last three decades.1
Driven by the recessionary increase in employment destruction, employment reallocation increased in 2009.
Over the last decade, entries and exits each accounted for less than 20% of employment creation and employment destruction on average (Chart 3). Continuing firms therefore played the primary role in employment dynamics during both the expansion and the recession.
The decrease in business-sector employment during the last recession came mainly (87%) from those firms that shrank their workforce but did not go out of business. This is consistent with findings from studies that compared the most recent recession in Canada with the two previous recessions. These studies found that the probability of being laid off was lower during the last recession2 and that Canadian employers relied more on shorter workweeks and less on job cuts during the last recession3 than in previous recessions. The modest role played by exiting firms in employment destruction is consistent with these studies since employment lost from firm shutdowns are more likely to be associated with permanent layoffs.
Goods and services sectors
Employment dynamics in the goods sector and in the services sector differed both during the expansionary and recessionary phases of the decade (Table 1).
During the 2001-to-2008 expansion, the two sectors had similar levels of employment creation, but the employment destruction rate was 1.6 percentage points higher in the goods sector. Thus, the lower net employment growth observed in the goods sector did not stem from lesser employment creation, but from greater employment destruction.
The goods sector was hard-hit by the recession, suffering a net loss of 7.6% of its employment; the corresponding figure for the services sector was 2.3%. Once more, the spread between the net employment growth rates posted by the two sectors is explained mostly by differences in the rates of employment destruction.
Attention is often focused on whether employment growth is concentrated in small or large firms. The answer to the question—who creates most employment?—depends very much on the time period chosen for the analysis. In the early post 2000 period, the relative contribution of firms of different sizes to net employment growth changed considerably from year to year, mostly because of substantial volatility in the net employment growth of the largest firms (Chart 4).
Firms with 500 or more employees were net employment losers four times: in 2001, 2002, 2004, and 2009. This size class accounted for 50% of the net employment decline in 2009. By contrast, these large firms contributed significantly to employment growth in 2003, 2006, 2007 and 2008. Micro-firms (fewer than five employees) were responsible for an average net employment gain of 41,000 every year during the 2001-to-2008 expansion. Although micro-firms' absolute net contribution was relatively unchanged, their annual share of net employment growth varied considerably, depending on the size of the change occurring in larger firms.
The net change in employment is a summary statistics that garners attention. However, this figure is the outcome of substantial reallocation and churning of employment at the firm level. The decomposition of net employment growth into gross employment creation and destruction provides a more detailed picture of what is happening within the Canadian labour market.
Information on annual employment dynamics in Canada is available in a series of six new CANSIM tables (527-0001, 527-0002, 527-0003, 527-0004, 527-0005, 527-0006). These tables provide information on gross employment creation, gross employment destruction, and net employment growth for employer businesses in the business sector. Estimates are available for different industries and firm size categories.
This article in the Economic Insights series is based on research on business dynamics carried out by the Economic Analysis Division of Statistics Canada. It makes use of the Longitudinal Employment Analysis Program (LEAP) file maintained by the Division, which is generated from administrative payroll data filed by Canadian firms. For more information, please see the following:
Chan, P.C.W., R. Morissette and M. Frenette. 2011. Workers Laid-off During the Last Three Recessions: Who Were They, and How Did They Fare? Statistics Canada Catalogue no. 11F0019M. Ottawa, Ontario. Analytical Studies Branch Research Paper Series. No. 337.
Ciobanu, O., and W. Wang. 2012. Firm Dynamics: Firm Entry and Exit in Canada, 2000−2008. Statistics Canada Catalogue no.11-622-M. Ottawa, Ontario. The Canadian Economy in Transition. No. 22.
Cross, P. 2011. "How did the 2008−2010 recession and recovery compare with previous cycles?" Canadian Economic Observer. Vol. 24. No. 1. Statistics Canada Catalogue no.11-010-X.
Haltiwanger, J., R. Jarmin and J. Miranda. 2011. "Historically large decline in job creation from startup and existing firms in the 2008-2009 recession." Business Dynamics Statistics Briefing. Kansas City, Missouri. Ewing Marion Kauffman Foundation. March.
http://www.kauffman.org/uploadedFiles/bds_report_3-22-11.pdf (accessed March 26, 2012).
Rollin, A.-M. 2012. Firm Dynamics:Employment Dynamics Arising from Firm Growth and Contraction in Canada, 2000 to 2009. Statistics Canada Catalogue no.11-622-M, Ottawa, Ontario. The Canadian Economy in Transition. No. 024.