The Role of Firms in Job Creation and Destruction in U.S. Manufacturing

Article excerpt

At least since the deep recession of 1981-82, changes in corporate organizational structure have been viewed as a primary cause of employment adjustment. The popular notion of corporate downsizing is a leading--albeit somewhat misleading--example, but other types of reorganization abound. Mergers and acquisitions, machine replacement and retooling, innovative production management strategies, outsourcing, business births and deaths, and related decisions about corporate structure typically are associated with the creation and destruction of jobs.

Motivated in part by these developments, research in recent years has documented extensively the fact that labor markets are characterized by large and pervasive flows of jobs among places of employment. [1] Researchers have developed large data bases such as the U.S. Census Bureau's Longitudinal Research Database (LRD), which contains detailed information on job flows among employers in manufacturing. In the U.S. manufacturing sector, for example, one in 10 jobs was destroyed and one in 11 was created in an average year between 1972 and 1993 (Schuh and Triest 1998). [2]

However, virtually none of this research and evidence pertains to the role of the firm and its decisions in determining job creation and destruction. Previous research and data-gathering efforts have focused on employment at individual physical locations called establishments, or plants. Information about the corporate ownership of the establishments either has not been available or has not been examined much yet.

This neglect is unfortunate, because it leaves fundamental questions regarding the role of firms in labor markets unanswered. In particular, to what degree do job creation and destruction result from firms shuffling jobs between plants that they own? Job reallocation occurring within firms may have very different causes and consequences from that occurring between firms. A firm that is simultaneously decreasing employment at some plants while increasing employment at others is likely engaged in an effort to reduce its cost of production or to shift the composition of its output across product lines so as to increase profits. In some cases, workers can be transferred between plants and the shift can occur without workers losing their jobs and suffering an episode of unemployment. In contrast, when the job shifts occur between (rather than within) firms, workers at firms that are destroying jobs will necessarily lose their jobs. And the causes of the shifting of jobs between firms may be quite different from t he causes of the within-firm job shifts. A firm with a decreasing level of employment may suffer from lack of access to credit, or it may have been hit with an idiosyncratic shock to its product demand (such as the entry of a new competitor in its product market) or cost structure.

This article provides initial results from our ongoing study of the role of firms and corporate reorganization in the determination of job creation and destruction (see also Schuh and Triest 1999a). We use information about corporate structure found in the LRD to construct measures of job creation and destruction over five-year intervals for U.S. manufacturing firms, and their plants, during the period 1967 to 1992. Although we would like to study this issue for nonmanufacturing firms and establishments as well, the LRD is the only suitable U.S. data base available at present.

Our results are striking. A sizable portion of the reallocation of jobs between plants owned by multiplant firms occurs within these firms. For example, less than half of the reallocation of jobs between plants owned by firms with at least 11 plants is between firms. A majority of the plant-level job flows for these large firms appear to be due to the shuffling of jobs between plants owned by the same firm. In contrast, nearly all plant-level job flows occurring at firms with only one or two plants are between, rather than within, firms. …