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.

05.02.07

Economic Trends

Employment Flows and Firm Size

Tim Dunne and Brent Meyer

In the second quarter of 2006, private business employment grew by 466 thousand jobs. Underlying this net gain of 466 thousand jobs was the creation of 7.76 million jobs and the concurrent destruction of 7.30 million jobs. The amount of gross job creation and destruction always greatly exceeds the net flows, as some firms expand their employment levels while other firms are contracting theirs.

While all of this labor market churning is driven by differences between companies and the unique set of circumstances that each faces, generally speaking, job creation and job destruction rates decline sharply as firm size increases. For instance, job creation and destruction rates for firms with more than a thousand employees were 2.5 percent and 2.3 percent in the second quarter of 2006. Corresponding rates for the smallest firms—those with one to four employees—were 16.4 percent and 16.3 percent. Does this mean that large firms are unimportant in accounting for overall job flows? No, it doesn’t.

Large firms may create and destroy jobs at low rates, but they employ a large percentage of all private sector workers (34 percent), which makes them an important source of aggregate employment flows. Firms with more one to four workers, in contrast, employ 8 percent of all private sector workers.

One significant difference between large and small firms is in the way jobs are created and destroyed. For the smallest firms, over half of job creation and job destruction comes through firm openings and closings, whereas in larger firms almost all job creation and job destruction occurs through changes in firm size.