Employment growth is a key measure of a region's economic performance. In Ohio lately, the news hasn't been good. Since the last business cycle peak in March 2001, Ohio's employment fell 3 percent, while the nation added nearly 1.6 percent new jobs. Relative to other states in the nation, Ohio fared none too well, ranking forty-seventh in terms of employment growth. Ohio's lagging employment growth hasn't just been a phenomenon of the recent business cycle either. After tracking and trailing the national average for different periods throughout history, Ohio has trailed the nation since the mid-1990s (see figure 1). In fact, from 1995 to 2001, Ohio's 0.6 percent average annual employment growth was well below the national average of 1.6 percent, placing it among the five states with the lowest employment growth over this period.
Why is Ohio's employment growth lagging the nation and other states? Until recently, it's been hard to tell for sure. Economists have relied mainly on aggregated data to study differences in net employment growth across regions. While net employment changes are usually tracked as a major indicator of the growth and decline of the economy, these numbers mask the underlying process of employment turnover. A growing number of studies have analyzed data at the firm level and found that job creation and destruction occur simultaneously on a large scale at all phases of the business cycle. In most of the industrial sectors and geographical regions that have been studied, it turns out that gross job creation and destruction, or the total number of jobs created and destroyed, is relatively large-far greater than one would suspect by looking at just the net change. Overall, this line of economic research suggests that if we want to understand the dynamic underpinnings of regional employment growth, it is important to study patterns of job creation and destruction.
This Economic Commentary takes a preliminary step toward understanding employment dynamics in Ohio, focusing on why Ohio's employment growth has struggled over the past 10 years. Using recently available data from the Census Bureau and the Small Business Administration,1 we examine how the entry and exit of firms in to and out of the economy, along with the growth of continuing firms, contributed to employment growth in Ohio from 1989 to 2001. We investigate how the patterns of job creation and destruction differ across states in order to identify any change in trends that contributed to slower employment growth in Ohio.
* Job Creation and Destruction
Economies are much more dynamic than it seems at first glance. Every day the U.S. economy adds thousands of jobs, and every day thousands more are destroyed. This turnover occurs as firms respond to changing economic conditions or technological improvements.
Most new jobs-about two-thirds of them-are created by existing firms, but new firms represent an important source of job creation as well. Similarly, firms that downsize but remain in operation account for the most jobs lost, but about one-third of all jobs destroyed result from firms closing.
To illustrate the dynamics of employment growth, let's look at an example. In the 1990s, the United States averaged net employment growth of 2.0 percent. This did not result from simply adding 2.0 percent more jobs every year; the process was much more intricate. This employment growth resulted from adding 16.7 percent new jobs every year while 14.7 percent of existing jobs were destroyed.
* Sluggish Job Creation
Figure 2 shows job creation rates for Ohio and the United States. To illustrate how Ohio's performance compares to that of other states, we also plot the average job creation rate for the five states with the highest employment growth and the average job creation rate for the five states with the lowest employment growth over the sample period.
During the entire period from 1989 to 2001, Ohio recorded lower job creation rates than the United States. …