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People and Businesses in Recessions

The stubbornly high unemployment following the last recession, coupled with corporate profits reaching record levels, can create a picture in the minds of people that businesses are having it easy at the expense of workers. This picture may be misleading. Recessions are also tough on businesses and business owners, but the data that reflect this are not nearly as prominent as the unemployment statistics.

The way we measure unemployment is fundamentally different from the way we measure businesses. Businesses can appear and disappear in response to economic conditions, but people tend to stick around no matter what.

There is no equivalent of a long-term unemployed worker in data on businesses. People can remain unemployed for months or years, and we will have data about these numbers. Businesses usually cannot remain without customer orders for many months and survive. Such businesses close their doors and disappear from data – data about sales, data about business profits, and other data.

If we were to measure people like we do businesses, we would count only those people who are employed and completely disregard the unemployed ones. That would create a picture of the labor market very different from the one we have. (Of course, I do not advocate this change.)

If we were to measure businesses like we do people, we would somehow have to measure the “unemployed businesses”. It means that we somehow have to account for all the losses the businesses that get no orders would be incurring had they stayed in operation – and then subtract that from the profits made by the profitable businesses. That would give a very different picture of corporate profits. (I do not advocate this change, especially since it is impossible to implement in practice).

There is a way to see the difficulties business face in recessions. We have data about business closures. The Business Employment Dynamics data collected by the Bureau of Labor Statistics tracks business births and deaths since 1992. By “business birth/death” BLS means an appearance or disappearance of a business establishment, not necessarily an entire company. For example, if Starbucks decides to permanently close one of its stores due to lack of demand, it would be recorded as a business death, even though Starbucks as a corporation continues to exist.

Private sector establishment births and deathsThe chart shows that business deaths spike during recessions. In each of the two recessions covered by the data, 2001 and 2007-09, the number of businesses permanently closing rose. It rose especially sharply in the deeper 2007-09 recession. Not surprisingly, recessions also cut the number of new businesses opening. During the 2007-09 recession, the number of new private establishments opening fell, and it has yet to recover to its pre-recession level. In the last quarter of 2012, the latest for which data are available, about as many new private establishments opened as was the case a decade ago.

[Photo: Imagineiti.com]

3 Comments Post a comment
  1. jb #

    This is an insightful article that brings to light an issue rarely described elsewhere. I wonder what the data would show over time, through various cycles when business taxes and regulations have waxed and waned. I suppose these factors cannot be easily defined or measured.

    Like

    April 29, 2014
  2. Hi Polina,

    Thanks for the interesting perspective. Is the Business Employment Dynamics data available at the state level? I am interested in the regional disparity of business formation. Are fiscally healthy states producing more businesses than high tax states? For that matter, does the data include firms which leave one state for another?

    I live in upstate New York and I often talk with people and businesses who plan to move because of taxes. As always, I am hoping to bring some quantitative analysis to discussions based on anecdotal experiences.

    Like

    April 29, 2014
    • Polina Vlasenko #

      Ted,
      There is some data about business employment dynamics by state — check this out http://www.bls.gov/bdm/bdmstate.htm
      I imagine the national data would include firms which leave one state for another — it would be a “death” of an establishment in one state and a “birth” in another. Remember that the data track establishments, not corporate identities. If the same company closed its operation in NY and opened it in FL, a business establishment died in NY and another was born in FL. As far as I know, the dataset does not attempt to link whether the establishments belong to the same company.

      Like

      May 1, 2014

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