Meet the Author

Timothy Dunne |

Vice President

Timothy Dunne

Timothy Dunne is a former vice president and economist of the Federal Reserve Bank of Cleveland.

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Meet the Author

Brent Meyer |

Economist

Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.

02.26.07

Economic Trends

Job Creation and Job Destruction

Tim Dunne and Brent Meyer

The BLS recently reported that job gains in the second quarter of 2006 totaled 6.9 percent of private sector employment, and job losses came in at 6.5 percent of employment. This represents 7.8 million jobs created and 7.3 million jobs destroyed in the quarter. Job creation is measured as the net employment change of establishments that are expanding employment plus the employment at newly opened establishments. Job destruction is measured as the net employment change at establishments that are reducing employment plus the employment loss due to establishment closings. The difference between job creation and job destruction reflects the net change in the number of jobs.

The 2001 recession shows both a dip in job creation and a jump in job destruction, resulting in a net job loss for the private sector. But the net change in jobs isn’t the only interesting feature of the BLS employment dynamics series. The degree of job churning is reflected there as well, in the rates of job creation and job destruction themselves, and in recent years both of those rates have declined noticeably. This drop in job creation and destruction rates is part of an ongoing trend documented in a recent paper on job flows by Steven J. Davis, R. Jason Faberman, and John Haltiwanger.

To summarize the amount of job churning present in an economy, economists sometimes use a measure called excess job reallocation, which measures the amount of job creation and job destruction that occurs above and beyond the adjustment necessary to account for the net change in jobs. (That is, the number of net jobs that were added or destroyed is subtracted from the total number of jobs created and destroyed.) Excess reallocation in the private sector held steady through 1990s but has declined in more recent years.

The recent decline in excess reallocation occurs across almost all industry groups and reflects an overall decline in both job creation and job destruction rates. Job reallocation rates vary markedly across industries, though. The natural resources and construction industries experience job reallocation rates three to four times as high as those in the manufacturing or education and health services industries.

Excess Reallocation By Industry

Industry Average excess
reallocation
1992:IIIQ-1999:IVQ
Average excess
reallocation
2000:IQ-2006:IIQ
Change in
excess
reallocation
Natural Resources and Mining 39.1 34.3 -4.8
Construction 27.0 22.9 -4.1
Manufacturing 9.6 8.2 -1.5
Wholesale trade 12.8 11.5 -1.3
Retail Trade 15.4 13.8 -1.5
Transportation and warehousing 12.9 11.8 -1.1
Utilities 5.4 5.7 0.2
Information 12.1 11.0 -1.2
Financial Activities 12.4 11.7 -0.7
Professional and business services 17.4 16.9 -0.5
Education and health services 9.9 8.9 -1.0
Other services 16.8 15.8 -1.0

Source: Department of Labor, Bureau of Labor Statistics.

Job reallocation has declined, in part, due to a disproportionately large fall in job creation and job destruction in opening and closing establishments. Although job creation and destruction by opening and closing establishments typically make up about 21 percent of overall job creation and destruction, they account for 35 percent of the decline in excess reallocation that has occurred since 2000.