Friday, May 10, 2013

Where Do Jobs Come From?

By Jonathan Miller, Project Associate.

Have you had the talk? And I don’t mean the one about the birds and bees. In economic development, part of the fundamental challenge is to understand where and how jobs are created – that’s the talk I’m talking about. Ostensibly, jobs can be created three ways: 1) from companies relocating to a community; 2) existing companies expanding; or 3) entrepreneurs opening new businesses. It would be great if these activities each created a similar share of jobs, because then organizations would be able to focus on these activities equally. However, this is not the case. 

The Edward Lowe Foundation’s seeks to answer the question posed in the title of this blog post and thus help communities and economic development professionals understand their job creation (and destruction) dynamics. The website provides establishment and employment data for a range of geographies (down to the county level) and details how jobs are created – from company relocations, expansions, or openings/closings. 

At the state level, it turns out that the majority of jobs are created by companies already existing in the state. The graph below shows the net number of jobs created between 2000 and 2010 by companies expanding/contracting, the number of jobs from companies moving in/out, and the number of jobs coming from companies opening/closing. The one constant is that every state derived more jobs – far more – from existing companies than from relocations.

Note: the graph is sorted by total job creation (the largest to the left) 

The two states that tend to be diametrically opposed in the battle for jobs – Texas and California – show quite different trends. California only created jobs, on net, from expanding businesses, while Texas, on net, had positive jobs from relocations and from expansions. On net, California lost 95,903 jobs to relocations (ostensibly some went to Texas), between 2000 and 2010. However, when it comes to businesses expanding, native California firms created 745,517 more jobs than those in Texas. So, while Texas is often rated as “business friendly” and California is not, the dynamics of job creation add depth to the reality. 

Looking at only raw numbers, the difference between jobs derived from expansions and those derived from companies moving into a state are even more staggering. Of the 50 states, the average ratio of jobs from expansions to jobs from companies moving in was 18.3. That means that between 2000 and 2010, within each state, almost 20 jobs were created by existing businesses for every job that moved in. The smallest ratio was in Delaware, where expansions still created five times more jobs than relocations. 

What does this mean for practitioners? Well, it means that proportionally, investment in business retention seems like a surer bet than investment in recruiting. This is not a total indictment of recruiting, because it is a source of jobs– just not as many as those coming from existing businesses.