Hamilton County’s employment has grown 16-fold since 1970 from 15,000 to 243,000. This is a 52-year compounded 5.5% growth rate. You aren’t likely to find that growth rate in your stock or mutual fund portfolio!
This growth started from a low base of 1,500 new jobs per year and accelerated to 5,000 new jobs per year by 2000. Hamilton County has maintained this growth rate for 2 decades with some extra results recently!
Hamilton County’s population doubled from 1970 to 1990. Metro Indy, excluding Hamilton County, grew by the same 50,000 people. In the next 30 years, Hamilton County added more than 250,000 people and the rest of metro Indy added a very solid 475,000 people (almost 2X). Hamilton County benefits from the Midwest leading growth of metro Indy.
Hamilton County employment growth has been a little faster than population growth.
Metro US population has grown by 1% annually and employment has grown by 1.6% annually. The Indy metro area has grown at similar rates. Hamilton County has grown 3-4 times faster.
As Hamilton County has grown, its annual growth rate has declined from 7% to 4%, still far above the 1.5-2% baseline growth rate.
Hamilton County has grown from 1/3,000 US people and 1/5,000 US employees to 1/800 citizens and workers. (4-6X growth).
Metro Indianapolis has been a solid job creator. Hamilton County has grown alongside the metro area.
Hamilton County was a “bedroom suburb” in its early days but reached the national level of jobs to population by 1992 and tracked the national average thereafter.
Between 1990 and 2008 US jobs grew by 22% but trailed in Midwest metro areas, increasing by only 14%. US jobs have grown by 9% since the Great Recession, with the Midwest trailing slightly at 8%. Metro Indianapolis has been a percentage growth leader in both periods, at 27% and 18%. Columbus and Kansas City show similar figures. Minneapolis has higher actual jobs added but slightly lower percentage growth on its twice as large base.
Chicago has added more total jobs, but its 18% growth is far behind Indy’s 49% and most of its growth took place back in the 1990’s. Nashville is typically grouped with the Southeastern states but if it was included in the Midwest, it would be the clear winner, nearly doubling its job base in 3 decades.
The US population has grown from 2.5 million in 1776 to 76.3 million in 1900 to 158.8 million in 1950 to 329.5 million in 2020. More than a 100-fold increase, 2+ orders of magnitude.
28 individual metro areas today EACH have a population (2020) equal to or greater than the WHOLE USA in 1776. Pittsburgh, Portland, San Antonio, Austin and Sacramento each have the same 2.5 million residents. Charlotte, Orlando, Baltimore and St. Louis each have a slightly greater 2.8 million citizens. 19 other metro areas today have a significantly larger population.
Declining Rural Population
The US began as 100% rural. By 1900, cities (2,500+) accounted for 40% of the total population. By 1950, city populations were the majority at 60%. In 2020, cities contained 80% of the US population.
Urbanization
In 1776, the US had 5 cities of 10,000 people, led by Philadelphia with 30,000.
By 1900 the nation had 11 major cities with a half-million people or more, led by New York with 5 million and Chicago, Philadelphia and Boston near 2 million. Baltimore on the east coast and San Francisco on the west coast were joined by the Midwest cities of Pittsburgh, St. Louis, Cleveland, Cincinnati and Buffalo to round out this group of early leaders. These 11 exceptions to the still largely rural landscape accounted for one-half of the urban population, 20% of the national population.
By 1950 there were 15 metro areas with a million people or more, up from just 5 in 1900. San Francisco, St. Louis, Cleveland, Baltimore and Buffalo exceeded 1 million as did newcomers to the major city list: Los Angeles (4.4M), Detroit (3.0M), DC, Seattle and Dallas-Ft. Worth. Kansas City, Minneapolis-St. Paul and Houston joined Cincinnati as “major cities” defined as greater than 750K residents. These 19 metro areas contained 50 million people, 31% of the nation’s total and a little more than half of all urban residents. Led by New York’s 13M, the east coast metros totaled 22 million people. Led by Chicago’s 5M, the Midwest metros were close behind with 18 million people. The 3 west coast cities combined for 8 million while the Sunbelt’s 3 cities amounted to just 2.5 million people.
For 2020, we use 2 million as the minimum size for a major metropolitan area. New York (20M), Los Angeles (12M) and Chicago (9M) led the way. Dallas-Fort Worth, Houston, Washington, DC, Philadelphia, Atlanta and Miami all had at least 5 million citizens. 15 new metro areas joined the list, beginning with 6 on the west coast: Phoenix, Riverside-San Bernardino, San Diego, Portland, Sacramento and Las Vegas. The others are widely distributed across the country: Tampa, Orlando, San Antonio, Austin, Columbus, Indianapolis, Charlotte, Nashville and Denver. These 35 metro areas account for nearly one-half of the country’s total population of 330 million. The 4 major regions were relatively evenly balanced: east coast (40M), Midwest (37M), west coast (45M) and sunbelt (43M).
One-half of Americans now live in one of the 35 major metropolitan areas, amounting to 162 million people. That compares with 50 million people in 19 areas in 1950 and 15 million people in 11 areas in 1900. The character of American life has shifted from rural to urban to metropolitan.
The White, non-Hispanic population has typically been 80-89% of the total. It has fallen rapidly to 58% as Hispanic, Asian and multi-race claimers have increased their shares of the population.
The share of immigrants reached a high of 15% from 1870-1910, dropped to 5% in 1960-1970 before reclimbing back to 15% recently.
Amazing Real Economic Growth
The growth in the size of the US Gross Domestic Product (GDP), the value of goods and services produced in the country, from 1776 to today is essentially incomprehensible at 19,000 times its original size. The population has grown 132-fold, from 2.5M to 330M. Real, inflation-adjusted GDP per person has averaged 2.0% per year across long periods of time. Due to compounding, this 2% becomes 2.7 times in 50 years, 7.25 times in 100 years, 52.5 times in 200 years and 141 times in 250 years.
In 1955 the 11 corporations at the middle of the newly created Fortune 500 listing averaged $123 million of annual revenue. Adjusting for inflation (GDP deflator), they would have revenues of $939 million today. Comparable revenues in the latest Fortune 500 listing are $15.6 billion, a 16.6X increase.
Over this same period total national real GDP has increased from $3.1 trillion to $21.8 trillion; 7.1 times as large. Large US-based corporations have grown twice as fast as real US GDP.
Summary
Small annual percentage changes add up to become transformations through time.
We see this in population, race, immigration, occupations, industries, urbanization, productivity, output and concentration of businesses.
The population and production scale, complexity, trade, product innovation and diversity of the US is beyond any expectations of the founders of the country. The country and its social, political and economic institutions have survived and adapted to allow the country to thrive for almost 250 years. Further adaptations may be needed to support such continued growth and success.
The last official forecast of Indiana’s population was made in 2012, estimating growth from 6.5M in 2010 to 7.5M in 2050. The actual population was a little higher than this forecast in 2020. My forecast is for 7.7M in 2050.
Indiana was and is an agriculture and manufacturing intensive state. Population growth slowed in the 1970’s and 1980’s before recovering in the 1990’s. Indiana added 1.2M people in the 30 years from 1990 to 2020, growing by 7% per decade, about one-half of the national average, but faster than its neighbors.
I expect the 2010-2020 growth levels to continue for the next 3 decades.
Indianapolis (Marion County) is the only major city in Indiana. It was also manufacturing intensive at the end of the 20th century. Its population growth stagnated in the 1980’s and 1990’s before recovering.
Indy’s suburbs were immaterial in 1970, but have grown to be nearly as large as the main city in 2020.
The total Indy metro area grew by 80% from 1990 to 2020 and is expected to grow at the same rate for the next few decades.
Like metro areas across the country, Indianapolis has grown much faster than the rural counties of Indiana.
Lake County (Gary) in the northwest corner of Indiana is the second largest metro area of Indiana. Its population dropped drastically from 1970 to 1990 and has slowly recovered. This manufacturing intensive area is not considered a highly attractive Chicago suburb, but it has found sources of growth.
The four counties east of Lake County are a separate economic area and have grown since 1970 at a reasonable pace.
The I-90 corridor’s population was the same size as metro Indianapolis from 1970-1990, but their growth paths diverged afterwards.
Historically, Ft Wayne has been the third largest Indiana city. It was also a manufacturing leader, which slowed its growth in the 1980’s and 1990’s. It has since recovered and established a strong growth rate.
Indiana has 6 other minor cities that have collectively accelerated their growth since 1990. Tippecanoe and Monroe Counties benefit from their state universities. Columbus (Bartholomew) is a manufacturing leader supported by its proximity to IU and Indianapolis. Clark County is a suburb of Louisville. Evansville (Vanderburgh) has struggled to find a new economic engine due to its small size and remote location, despite the extension of I-69. Terre Haute (Vigo) has also been slow to find new engines of growth to replace its historic manufacturing strengths.
These 18 larger counties (of 92) have collectively driven almost all of the population growth in Indiana for the last 30 years. These trends are expected to continue for the next 30 years.
A broad swath of 13 counties north, east and northeast of Indianapolis have seen population declines in the last half century and will likely experience further declines. The natural gas boom, Wabash River transportation advantage and national road (US 40, I-70) advantage drove manufacturing in these areas in the early twentieth century. General Motors grew and then declined. The Ball Corporation grew and declined. Muncie was the subject of the famous Middletown sociology studies of the typical American community and this area, and the greater Indianapolis area have remained targets of marketing and political research studies. Logansport, Peru and Wabash along the river. Marion, Anderson and Muncie. Hartford City, Portland, Randolph, Richmond, Connersville, Newcastle and Rushville. The 61 other Indiana agricultural counties managed to grow slowly from 1970 to 2000 but found their limits afterwards.
In the modern world, local economies must find “critical mass” in order to succeed. Metro Indy is doing well. The I-90 corridor near Notre Dame is surviving as are the other mini-metro areas. The other 74 counties are stagnant.
Electricity generation, turbines, batteries, electric motors.
Steam engine, turbine.
Internal combustion engine, automobile, tractor.
Railroad, locomotive.
Anesthesia.
Distilled oil products, diesel, kerosene and gasoline.
Telephone.
Circa 1900
Airplane
Automobile
Camera; digital camera
Electric light bulb; fluorescent, LCD, LED
Moving pictures
Phonograph
Radio
Refrigeration
Vaccines
Medical diagnostics: X-Ray; MRI, CT scan
Antibiotics, penicillin
Circa 1950
Electronic computer, Turing machine, personal computer; after arithmetical machines, abacus and slide rule.
Contraceptives
Geographical positioning system, (GPS) and mapping.
Vacuum tubes, integrated circuits, semiconductors and microprocessors.
Nuclear fission, fusion, power and bombs.
Television.
Circa 2000
Genetics, gene editing, DNA.
Mobile phone networks, infrastructure and personal devices.
Internet communications network.
World wide web addressing structure.
Artificial intelligence.
Smartphones.
Summary
The greatest technical innovations of humanity cover a broad range of life: food/cooking, construction, travel, transport, household, finance, science, power, medicine, entertainment and calculation.
We have a dozen major inventions in both of the 19th and 20th centuries. Change appears to be accelerating…
Hamilton County, Indiana is north of Marion County and Indianapolis. It has grown seven-fold since 1970, from 54,000 to more than 365,000 people. It now ranks in the top 7% as the 209th largest county of the 3,142 in the US. It is the fourth largest of Indiana’s 92 counties, trailing Marion (Indianapolis), Chicago’s suburban Lake County and Allen County (Ft. Wayne) which it will surpass for third place in 2029.
The county has averaged a 7,800 person annual increase since 1990 and has maintained a 7,500-person annual increase in the last decade.
Growth reached a peak of 12,000 per year prior to the Great Recession, dropped back to 7,000 per year and has slowly grown to 8,000 per year.
As a growing suburban area, the county has benefitted from a younger population with relatively more births and less deaths. This demographic advantage has decreased through time.
On average, this natural increase advantage has provided 2,000 additional people each year for the last two decades. The net in-migration level was over 8,000 before the Great Recession, dropped in half to 4,000 before recovering to about 6,000 people per year.
The US Census Bureau’s American Community Survey (ACS) attempts to measure the annual migration flows between all 3,142 counties! It’s survey techniques generally require a 3-5 year sampling period to have statistical reliability. The US Census Data and the Indiana Vital Statistics Data (Births and Deaths) show an implicit net in-migration to Hamilton County from 2011-20 of 4,575 annually. The ACS reports just 3,124. The actual increase is 144% of the surveyed increase.
Hamilton County’s population ranged from 283-346,000 between 2011-20, for an average of 314,000. Inbound migration averaged 23,600 per year or 7.6% of the population. Outbound migration averaged 20,400 per year or 6.6% of the population. On average, the county’s population turns over every 15 years. The net in-migration in the ACS survey was 3,100, a little more than two-thirds of the implicit 4,600 net in-migration per year. I compared the 2011-2015 and 2016-2020 data and found that they were generally consistent. I believe that the proportions reported are generally accurate.
International In-Migration
ACS reports an annual average of 1,800 international immigrants. This is 59% of the net 3,100 figure; quite material. On an annual basis, this is just 0.6% of the county population, but for a decade it is 6%. 61% of Hamilton County’s international immigrants report Asia as their home continent.
Total US Migration
Net in-migration to Hamilton County from the US is a positive 1,300 per year in the ACS survey, perhaps 1,900 including the 1.46X factor. Net domestic net in-migration is two-thirds the size of international net in-migration; 0.4% annually or 4% per decade.
48 States Aside from Indiana and Illinois
Net in-migration to Hamilton County from the other 91 counties in Indiana plus Illinois averages 3,004 per year, essentially equal to all of the total net in-migration. Net in-migration to Hamilton County from the other 48 states is a negative 1,700 per year, roughly one-half of the positive overall net in-migration figure. Hamilton County receives minor positive inflows from the adjacent states of Ohio, Michigan and Kentucky. It sends 1,000 residents to Texas each year and receives just 400 in return. Texas accounts for one-third of Hamilton County’s net out-migration aside from Indiana and Illinois. Hamilton County exports 1,200 residents annually to Florida but an equal 1,200 return each year.
Chicago, Illinois
In the last decade 1,500 people annually moved to Hamilton County from Illinois (Chicago) and just 700 returned the favor. Hamilton County received a net 800 residents from Illinois each year in the past decade. This is one-fourth of the net in-migration to Hamilton County. Many Hamilton County college graduates make Illinois their first professional home, so the flow of experienced professionals from Chicago to Hamilton County is probably more than 1,500 per year.
Marion County, Indiana (Indianapolis)
Hamilton County’s Carmel, Fishers, Westfield and Noblesville claim that they are “edge cities” somewhat independent of Indianapolis. In the last decade a net 3,300 migrants from Marion County chose to make Hamilton County their home each year, accounting for more than ALL of the ACS survey’s 3,100 annual increase. Marion County has nearly 1 million people and continues to grow slowly despite this 0.3% annual leakage to Hamilton County.
College Students
Hamilton County school graduates have very high college attendance rates. Hamilton County exports 2,600 students each year to IU, Purdue and Ball State and receives 1,000 back, for a net out-migration of 1,600 per year, about one-half of the net in-migration figure.
Indiana
Hamilton County has a minor net in-migration from sparsely populated Boone County to its west (300/year). It’s net in-migration with the 8 nearby counties, including Boone, is a 500 loss. Hamilton County is an attractive suburban destination, but net net it loses 500 residents annually to nearby counties other than Marion.
Setting aside Marion County and the 3 university counties, Hamilton County attracts 500 new residents annually from the other 87 Indiana counties.
Summary
Hamilton County enjoys a 2,000-person annual natural population increase due to its relatively young age profile. Half of its 6,000-person annual net in-migration is driven by international immigrants attracted to its schools, amenities, services and culture. Most of its remaining growth is driven by nearby Marion County residents who are seeking the same results. Hamilton County is attracting residents from Chicago as retirees, commuting residents or transplants. Hamilton County loses about 2,000 college students each year who migrate into a national labor market. This is an opportunity for further population growth. It also shows that the net 3,100 growth per year figure understates the attractiveness of this county to all potential migrants.
Real, after inflation, Gross Domestic Product is up by one-third, despite the pandemic. That’s 2% annually, despite the Great Recession and the pandemic. The US economy is very solid.
A 21% increase in per capita income during this time. Quite solid and constant growth.
Inflation averaged a bit less than 2% before the pandemic, spiked to 8%, and has since declined to 4%. Experts disagree on whether it will return to 2% soon.
Gas prices are the most obvious component of inflation. They are largely driven by global supply and demand. Prices today are the same as in 2011-14, despite the general inflation increase of more than 20% since then.
Despite the pandemic, US unemployment is at a 50 year low!
Job seekers today encounter 3 times as many job openings.
Core age labor force participation has snapped back after the pandemic.
Investment values have doubled.
The number of millionaires and billionaires in the US has continued to increase.
Personal savings rates rose from 6% to 9% before the pandemic, shot up and fell back down to just 4% recently.
Housing values have doubled since the Great Recession.
Mortgage rates averaged 4% after the Great Recession, dropped to 3% and then increased to 6%+ as the Federal Reserve raised interest rates.
US exports have nearly doubled in 14 years.
Despite the Trump tariffs, which Biden has maintained, imports have also nearly doubled.
Despite historically slower growth rates, higher budget deficits and looser monetary policies, the US dollar is more highly valued today than in 2008.
Foreign countries still see the US as a positive ally, despite their concerns during the Trump era.
Obama returned the budget deficit to a “reasonable” 3% by 2016. Trump expanded it to 5% and then 15% as the pandemic struck. Biden drove some recovery to 5% by 2022, but has not driven further reductions.
US coal production is in a long-term decline.
Natural gas production has nearly doubled in 14 years.
Net farm income has been significantly above the base for 6 of the last 14 years, despite lavish Trump farm subsidies.
Manufacturing employment has continued to rise slowly in the last 14 years against the headwinds of international competition.
It’s difficult to put the pandemic in perspective, but here we see a 2-year reduction in expected lifespans. Opioid deaths and so-called “deaths of despair”, alcohol, drugs, suicide, also play a role.
Birth rates continue to drift lower as seen in all regions of the world.
The number of retirees has increased by more than 50%.
Retiree incomes are up by one-third, matching inflation.
Prospective retirees have doubled their cumulative savings.
The abortion rate has continued to fall in the last 30 years.
Church attendance has dropped from 40% to 30%.
Summary
The US economy recovered slowly after the Great Recession and then very quickly after the pandemic. Real, after inflation, output and per capita output increased. The labor market became very tight. Asset prices (investments and housing) rose for intrinsic and monetary reasons. The US remained a competitive international producer. The federal budget deficit was better at the end of the Obama period but worse for Trump and Biden. The pandemic reduced life expectancy and households had fewer children. Successful retirements grew and will grow. Social trends continue, uninterrupted by political positioning and policies.
Perceptions of the country and the economy are increasingly shaped by partisan political party views. Nonetheless, the US economy continues to grow and thrive.
The alliance of 13 independent states to become the United States of America enshrined the notion of “minority representation” in the US constitution. North versus South. Different religious majorities. Rural versus urban. Domestic versus international leaning. Free versus Slave.
We should embrace that principle but fine-tune the mechanism. Two senators per state when the population was just 3 million was a practical compromise. The US population reached 300 million in 2006; 100 times larger. The numerical and proportional differences today are simply too large to ignore. Louisiana and Kentucky at 4.6 million people are the median states. The average state population is 6.6 million today. 5 states, SD, ND, AL, VT and WY have less than 1 million citizens. They get 5 to 7 times more representation than the “typical” state. I recommend that we accept this difference as a way to preserve “minority representation” and the legitimacy of our democratic system.
On the top side, four states stand out. California (39M), Texas (30M), Florida (22M) and New York (20M) have populations 5-8 times the median and 3-6 times the average population. [For perspective, note that California’s population today is 13 times as large as the whole country in 1780.]I recommend that these four states be given 2 extra Senators since they have more than 4 times the median state population. Seven states have populations more than twice as large as the median 9M: PA, IL, OH, GA, NC, MI and NJ. I recommend they each get an additional Senator.[California (19x), Texas (15x), Florida (11x) and New York (10x) after these changes are still less represented than the dozen states with populations of just one million, rounded; just not so disproportionately.]
This change would add 15 Senators. It would dilute the “minority representation” of the other 39 states by 15%.
Fortunately, the political impact of this change would be modest, so both parties can support this improvement in political legitimacy. CA and NY are Democratic locks, while Texas and Florida are Republican locks. Illinois and New Jersey are Democratic locks, while Ohio is a Republican lock. Pennsylvania and Michigan lean left, while Georgia and North Carolina lean right. Net, net this change adds one Democratic Senator out of the new 115 seats, an immaterial number.
The Senate is a very important part of our government. It acts as a check on the more representative and responsive House. It approves treaties, constitutional amendments, judges and presidential appointments. The number of Senators drives the size of the electoral college. Changes should not be made without due consideration.
My Republican colleagues might reject this “out of hand” because it costs them a Senate seat today and it reduces the future leverage of less populated states. I think that the legitimacy of our government, to prevent populist winners and civil war is reason enough to “fine tune” our system. Republican oriented Texas and Florida are growing faster than California and New York, so their citizens are the most “disenfranchised” by the current system in the future. A revision might block the pressure to admit DC and PR as states. Four of the five next least populous states are likely Democratic states in the future: DE, RI, ME, NH versus MT, which has some Democratic voting potential. The next, Hawaii, is a Democratic lock. In the next five, KS, NE and WV are safe Republican seats, but Idaho and New Mexico could follow Colorado and Nevada into the other party’s column.
It’s time for all Americans to step out of their partisan comfort zones and think about what is best for the country in the long-term. This is a reasonable change that everyone should support.
The relationships between firm size, age, growth, survival, death, locations and job creation and retention are many, complex and politicized. However, the core relationships expressed in my 2 recent posts are well supported by data and theory. I’d like to share more background information.
The 10-year job survival rate for startups is roughly 80% and has improved in the last 10 years. However, the FIRM survival rate is much lower. The surviving firms, through economic natural selection, grow rapidly from a low (4 average employees) initial base.
This study of 2011-14 highlights the initial start-up job surge, followed by 10 years of net job attrition and then modest net job growth by mature firms when low firm death rates (5%) are exceeded by decent levels of net jobs added.
The Small Business Administration (SBA) reports the average firm survival rates for 1994-2019 as roughly two-thirds for 2 years, one-half for 5 years, one-third for 10 years and one-fourth for 15 years.
My review of the 10-year data confirmed the 33% rate for most of the period, with an increase to 36% for firms that began after the Great Recession in 2010-12.
In 2010, Kauffman Foundation researchers summarized the detailed Business Dynamics Statistics (BDS) data, showing the relatively slow decline in net added employment from 100% initially to 80% at 5 years to 70% at 15 years and the rapid decline in the surviving firms rate to one-half at 5 years, 40% at 10 years and just 20% at 25 years.
Another Kauffman report from 2010 shared similar results. The universe of firms is dominated by young firms because the cumulative attrition makes “mature” firms quite rare.
Another Kauffman report in 2009 summarizes this competition between dying firms killing jobs and surviving firms adding jobs. In the first 5 years, the firm failure rate is so high that it overwhelms the high job growth rate of those successful startups. In years 6-10, the death rate is still winning, but the total net job destruction is much smaller. For this 18-year data set, firm deaths exceed added jobs at every age, although 29+ year-old firms basically break-even. This is a critical insight when thinking about the claim that all or nearly jobs are added by startups. It is “true” due to the firm survival and jobs added rates at different ages. It is possible to have quite different results, with existing firms accounting for relatively more jobs, but that would require either the firm/establishment death rates to fall or the job creation rates of surviving firms to increase significantly. It looks like there has been some of that change after the Great Recession. This chart also helps to show that the “net, net” addition of jobs from start-ups, when considered as the sum of their first 5 years is in the 75-80% range, because the net jobs lost in those early years is only 5% per year, despite the more rapid loss of firms.
My summary of the last 30 years of data shows that startup firms do account for “all” new job growth. As others note, in a way this is almost “by definition”, because this is the only age group that only has “adds”, but no “losses”. It always must be positive. As we’ve seen in the details on job departures/hires, jobs created/lost, firms created/lost and establishments created/lost the positive and negative flows tend to be “roughly equal”. Hence, even a single year which is not burdened with an offset will stand out as the “big winner”. So, on the one hand we can discount the critical, essential, vital role of startup job creation, but we can’t ignore it. It is a necessary part of the life cycle of firms that delivers a growing economy.
The 2010 Kauffman study combined the initial jobs created with the jobs lost in the next years to emphasize the vital role of startups, using 2007 data. Mature firms also made a small contribution to jobs added.
A follow-up report in 2011 by Dr. Haltiwanger summarized the data slightly differently but tells the same story. New firms, nearly all “small”, account for almost all job growth. Other small firms destroy jobs in their first 10 years at a high rate and as mature firms at a modestly high rate. Middle-aged firms lose jobs while successful firms grow to more than 500 employees and become large firms! Young large firms add a few net jobs. Old large firms lose a small percentage of jobs for this time period (1992-2005).
The central takeaway remains valid with more recent data across industries. The initial growth of jobs is not offset by the net losses in the next 5 years. Firms more than 6 years old do not add jobs overall.
I don’t know how to reconcile these competing claims but expect that the time periods chosen, and firm sizes chosen, are keys to understanding the significantly different claims.
In the early papers the Kauffman Foundation explains that it is new firms that drive new jobs. There is an overlap between new firms and small size that makes an analysis based on size alone appear to say that “small firms create most new jobs”; but the “newness” logically comes first. Existing small employment firms tend to shed jobs through firm death or internal job reduction.
A simple model focuses on just the first 5 years of a firm’s life after the initial startup year and defines four buckets of job growth and loss due to adding new establishments or experiencing deaths versus internal job growth (up or down) at the survivors. All four buckets matter. New establishments are infrequent for startup firms. Deaths are a major job killer. Job creating firms outweigh job losing firms. But the net gains from internal job growth is less than the drag from firm deaths.
Kauffman also created a complete theoretical model of job changes through time based on the key parameters and demonstrated that the model was a good match with the observed relative consistency of the parameters and the net output of jobs created. In a prior life, we called this the “layer cake” graph, using it to explain the composition of revenues or profits in a business based upon the year of customer contracts signed or new products introduced. At any point in time, there is a history of additions of various ages. Employment tends to decline over time based upon the combination of firm deaths, establishment gains/losses and internal job growth. Each year a new group of firms is added, all with job gains in the first year. This group too follows the pattern of job erosion in the first 5 years, smaller erosion in the next 5 years, close to break-even by age 20 and small net job creation for the mature surviving firms. Again, the parameters could be different, and the results would be different. But this framework provides economists and statisticians with the tools to analyze the components.
Another author created a dynamic model which illustrates how this process works through time.
The Small Business Administration promotes the view that small businesses (less than 500 employees) are essential to the US economy and create a majority of all jobs. As noted above, startups are the key. Size is a byproduct.
In my earlier post I discounted the importance of the decline in the share of new to total firmsbecause the corresponding decline in failure rates and improved job creation by mature firms was still delivering solid annual job creation. However, this warning signal is worth monitoring together with the other measures. The Brookings Institution provides some other “warning signals” about the health of the new firm/job creating capacity of the economy in light of reduced measurable competition in many industries (a topic for another day).
New firms account for a smaller share of total employment.
Business formation takes longer. Recent Kauffman reports shows that this trend has continued.
The entrepreneurship rate of college educated Americans has fallen most significantly.
One professor analyzed this and concluded that it was the result of American firms taking advantage of the low cost of capital and paying the higher salaries and incentives needed to attract and retain high potential employees. He says that job creation is happening more in existing firms and less in startups with no negative overall effect. He says that “marginal” (low return) entrepreneurs have been removed with little negative impact on the economy as a whole.
The slowdown in the new firm/job creation rate after the Great Recession attracted much attention from the media and politicians. Two representative articles are listed below, mostly bemoaning the decline of startups/small firms and the relative growth of large firms.
With the renewed emphasis on small firms and public policy to support them, others have responded by emphasizing the benefits of large firm growth and questioning the need to support/subsidize small firm growth.
Using less than 250 employees to define “small business”, this article shows a 4% decline in small business share and 4% increase in large business share.
Professor Haltiwanger reports that large, mature firms have increased their share of total employees from 50% to 60% between 1992 and 2018. Both large and small young firms have lost offsetting market share.
A recent Census Bureau article documents the increased employment share of older firms (6 years+) in many key industries.
It also highlights the increased concentration of workers in large firms in the retail, health care, accommodation and food services sectors.
The WSJ articles itemizes the increased concentration of employment in large firms in the retail, services and finance sectors and documents that these are the growing segments of the economy.
Summary (It’s Complicated)
The Business Dynamics Statistics database provides researchers with the consistently defined and reported data since 1977 to document the key role of startup firms in adding net new jobs to the US economy. Startup firms are one part of an ecosystem of firm, establishment and job creation and destruction that plays out through time in relatively predictable ways. The death rates of young, middle age and mature firms play a similarly important role. The growth and decline of new establishments in existing firms matters. The internal job growth rates of young, middle age and mature firms matter. The relatively small size of startups compared to mature firms has an impact on job growth. Historical parameters are generally similar and change slowly, causing the layers of employment by firm age to be similar in this 50-year period. The model and framework for measuring firms, establishments and jobs is solid. Startup firms are essential, but they are not the only driver of success.
“Jobs created by firm size” is similarly shaped by all of these factors which describe the typical firm life cycle. Small firms are not superior job creators. New firms are job creators, and they happen to have small individual employment levels (4 on average), so small firms have higher measured rates of job creation.
In the last 10-20 years there has been a significant decline in the rate of new firm creation as a share of total firms. New firms created have not lost as many jobs due to firm deaths in their first 5-10 years. Mature firms continued to shed a disproportionate number of jobs during recessions, but after the Great Recession began to add more net jobs due to internal growth than they had in the prior 40 years. The overall number of jobs created has remained in the 2-4 million per year range across the 50 years.
The conservative SBA, Kauffman Foundation, WSJ and Republicans promote policies to ensure a thriving entrepreneurial environment for new and small businesses. The more liberal Brookings Institute, college professors and Democrats have an instinctive distrust of big business and concentrated economic power, so also lend support to some pro-small business policies. If job creation falters during periods of economic prosperity, this may be a rare place where bipartisan agreements could be reached to promote new firm and job creation.
Many people complain that the US economy does not create enough new jobs or soon won’t create enough jobs or won’t create enough good jobs or … People worry about employment. Writers and politicians cater to that worry. Fortunately for us, the US economy creates jobs year after year after year, only briefly interrupted by increasingly less frequent and brief periods of economic recession. I’ll share the core numbers on healthy firms and new jobs and provide some context and history which indicates that this is inherent in the modern US economy. The economy is not relying upon any major political change or special insight to continue adding jobs. It just happens.
For 9 straight years, from 2011-2020, across 3 presidential terms and 5 congresses, the US economy added 2 million new jobs each year. In the 1980’s, it added 2-4M per year. In the 1990’s it added 3M per year. In the “oughts”, it added 2M per year. 30 years of expansion, 7 lesser years that averaged more than zero. 4 strong years for every 1 weak year..
The recovery since the pandemic has been even stronger, starting at 8M new jobs per year in 2021 before sliding to 6M per year and most recently 4.5M per year.
The total number of firms in the US grew slowly in the last 40 years, from 3.5 million to 5 million. The growth rate was much faster prior to the Great Recession (2007-9). Much of this growth was accounted for by single employee firms. Despite this tame 1% growth per year, the economy was able to add more than 2 million jobs per year.
The US economy requires some growth in the number of firms or establishments each year to drive job growth. Fortunately, it does not require heroic growth rates.
The number of new establishments added per year is remarkably consistent, averaging about 700,000 per year on a base of 5-7M. Of course, this means that the RATE of new establishments is shrinking, from 14% to less than 10%.
Establishment exits have increased from 500K to 600K to 700K before returning back to 600K per year. Big picture, 700K new establishments and 600K lost establishments each year across 4 decades.
Firm deaths have also been consistent at 450,000 per year.
Data calculated from BDS data. Direct graph not available.
Firm births have also averaged about 450,000 per year but present a different pattern. Firm births were much lower in the troubled time around 1980. Births ranged from 450-500,000 per year in the next 25 years. The Great Depression destroyed businesses, access to capital, personal net worth and aggregate demand. Hence, new firm creation dropped back to the 400,000 level. It recovered back to the 450,000 per year rate by 2015. As with firm deaths, the rate has fallen from 14%+ to less than 10%. Most importantly, the birth and death rates have been relatively consistent and have both been relatively flat, leading to a slow increase in the number of US firms.
The BDS database shows that job gains and job losses generally move together, but that in a recession job gains fall and job losses increase. This is a very important result. Without active government or policy intervention, the economy creates 12-14M jobs each year and destroys 11-13M jobs each year. There is no guarantee that net jobs will be created in any given year, but overall that is the normal result.
Writers who wish to emphasize the decline of entrepreneurship focus on firms instead of establishments because of the slower growth rate. They emphasize the growth rate rather than the growth numbers because this is less positive. They don’t compare the growth and death rates or numbers, which move together. They focus on the aftermath of the Great Recession which did greatly slow firm creation, resulting in slower than historical numbers and rates of job creation from new firms. Nevertheless, the economy created 2M new jobs per year for 9 years. During that period, existing firms captured a larger than usual share of the job growth required to provide demanded goods and services.
New establishments have driven 5-6M new jobs each year. The late nineties to early “oughts” reported the higher 6M per year figure.
Existing (continuing) establishments have added 10-12M gross new jobs each year.
Establishment deaths (including firm deaths) resulted in 4-5M jobs lost each year.
Continuing establishments trimmed 8-9M jobs each year, and many more during recessionary times. Although there are many moving parts, continuing firms eliminate more jobs than they create, especially during recessionary periods when they are adapting to lower demand. Firms die and they close locations, removing 4M jobs each year. New firms and new establishments add the new jobs required to fill the 2M net new jobs each year. This does not happen automatically or precisely, but overall, through time, the pattern is clear.
The US job market has grown from 90-150M positions during the last 40 years.
Firms hire 75M people each year. The typical job tenure is just 2 years.
Separations and hires generally move together. The net 2M jobs added annually is a small fraction of employment, hires, separations, gross job adds and gross job losses.
Establishment births exceed establishment deaths except during deep recessions.
New firms have high failure rates. Fortunately, firms that survive their first year have high percentage rates of new hires. They start with a small number of employees (4) and grow rapidly. The survival rate improves with the age of the firm and the employment growth rate of surviving firms tends to decline as they grow. The combined effect is that 80% of the new employees added by startup firms remain after 10 years. This employment survival rate has been improving in the last 15 years, partially offsetting the reduced number of start-up businesses.
The share of “new employer businesses” dropped after the Great Recession and has not fully recovered.
The number of application for new business tax ids increased significantly after the Great Recession and jumped by 50% after the pandemic.
The Census Bureau also tracks a subset of the total new business applications based upon industry classification that is a better predictor of actual businesses eventually started. This measure shows modest growth after the Great Recession and a 30% spike after the pandemic.
About 10% of new business applications become new businesses. Hence, the rate of new business formation to be reported for 2022 is expected to be very high.
About 80% of new businesses are formed based on opportunity and 20% based on necessity. Kauffman estimates that 2020 business formation was 30% based on necessity.
Summary
The US economy continues to generate 2 million new jobs in each non-recession year, even more in boom periods like the last 2 years. Firms and establishments are born, grow and die. The net employment growth rate for established firms is less than zero in their first 5-10 years and then slightly positive. The annual death rate of existing firms and establishments is relatively low, but on a 150M employee base it is 4M per year. The new jobs added by startup firms and new establishments allow the total number of employees to grow in normal years.
There is no “iron law of employment” that requires new firms or establishments to be created in numbers greater than the job losses. There is no law that requires surviving young firms to nearly offset job losses by young firms that die at a high rate. There is no law that requires mature firms (10 years old+) to add new employees or to die at slow rates. But these results have been consistent or improving for the last 40 years. I look forward to continued success.
Good News 