One of the primary ways an economy expands is by quickly reallocating resources to the places where they are most productive. If new and productive firms are able to quickly grow and unproductive firms can quickly shrink, then the economy as a whole will experience faster growth and the many benefits (such as lower unemployment and higher wages) that are associated with that growth. Certain individuals may experience unemployment spells from this reallocation, but economists, starting with Joseph Schumpeter, have found that reallocation is associated with economic growth and wage growth, particularly for young workers.
Recently, a number of prominent economists such as John Haltiwanger have expressed concern that falling reallocation rates in the United States are a major contributor to the slow economic recovery. One simple way to quantify the speed of reallocation is to examine the job creation rate—defined as the number of new jobs in expanding firms divided by the total number of jobs in the economy—and the destruction rate, defined likewise but using the number of jobs lost by contracting firms. Chart 1 plots both the creation and the destruction rates of the U.S. economy starting in 1977. These measures track each other closely with creation rates exceeding destruction rates during periods of economic growth and vice versa during recessions. The most recent recession saw a particularly sharp decline in job creation (you can highlight the creation rate by clicking on the line), but it is clear this decline is part of a larger trend that far predates the current period. A decline in these rates could indicate less innovation or less labor market flexibility, both of which are likely to retard economic growth. Feel free to explore the measures for yourself using the figure’s interactivity.
To better understand these important trends we create a common variable called reallocation, which is defined as total jobs created plus total jobs destroyed, divided by total jobs in the economy. This formula creates one measure that describes how quickly jobs are moving from shrinking firms to expanding firms. Using data from the U.S. Census Bureau’s Business Dynamic Statistics, we examine differences in this variable across sectors and across states. Furthermore, using some basic data visualization tools, we can see how reallocation has evolved over time across these dimensions.
Chart 2 plots reallocation rates by industry from 1977 to 2011. The plot highlights the reallocation rate for all industries, but you can also select or deselect any industry to more clearly view how it has changed over time. Scrolling over the lines allows you to view the exact rates by industry in any time period. A few interesting patterns emerge. First, sectors have different levels of job reallocation in the cross section. Manufacturing stands out as having particularly low reallocation rates, probably the result of the large fixed-cost capital requirements required in production. Second, not all industries experienced sharp declines during this period. If you highlight the finance, insurance, and real estate sector, it is evident that reallocation rates actually increased for this sector until the most recent recession. Retail and construction, on the other hand, have experienced steady and significant declines during the past 35 years.
Chart 3 maps reallocation rates across states for the year 1977. This figure provides us with a cross sectional view of geographical differences in reallocation rates. States with the highest reallocation rates are dark brown, and states with the lowest rates are light brown. You can click through the years to visually capture how these rates have changed overtime for each state. Compare the color of the map in 1977 with the color in 2011. Scroll the mouse over any state to view that state’s reallocation rate in the particular year.
As with industries, states display clear cross sectional differences in their reallocation rates. The highest rates are found in western states, Florida, and Texas, and the lowest are in the Midwest. Scrolling through the years shows that the decline in reallocation rates is common to the entire country.
Overall, these figures display a stark trend. The economy is reallocating jobs at much slower rates than 20 or even 10 years ago, and this decline is, with only a few exceptions, common across states and industries. Economists are just now starting to explore the causes of this trend, and a single, compelling explanation has yet to emerge. But some explanation is clearly in order and clearly important for economic policymakers, monetary and otherwise.
By Mark Curtis, a visiting scholar in the Atlanta Fed's research department
Please note that the charts and maps in this post were updated and improved on November 27, 2013.