Measuring the Dynamics of Young and Small Businesses
Integrating the Employer and Nonemployer Universes

Papers and StudiesWe develop a preliminary version of an Integrated Longitudinal Business Database (ILBD) that combines administrative records and survey data for all employer and nonemployer business units in the United States. Unlike other large-scale business databases, the ILBD tracks business transitions from nonemployer to employer status. This feature of the ILBD opens a new frontier for the study of business formation, early lifecycle dynamics and the precursors to job creation in the U.S. economy. There are 5.4 million nonfarm business firms with employees as of 2000 and another 15.5 million with no employees. Our analysis focuses on 40 industries that account for nearly half of nonemployers and 36 percent of nonemployer revenues. Within these industries, nonemployers account for 14 percent of business revenues. About 220,000 of the seven million nonemployers in our selected industries hire workers and migrate to the employer universe over a three-year horizon. These Migrants account for 20 percent of revenue among young employers (three years or less since first hire). Compared to other nonemployers, the revenue of Migrants grows very rapidly in the year prior to and the year of transition to employer status.

Introduction

The measurement of economic activity by federal statistical agencies focuses greater attention on larger, more mature business units. This data gathering strategy has two clear advantages. First, it yields greater accuracy in estimating the level of economic activity, whether "greater attention" takes the form of higher sampling probabilities or more careful auditing and editing. Second, it is easier to identify and promptly capture the activity of large, long-established business units. On both counts, the desire for a cost-effective approach to measuring the level of economic activity leads naturally to a focus on larger, more mature units.

There are, however, drawbacks to this data gathering strategy. When responses to shocks and new developments in the economy vary systematically with business size or age, a focus on larger and more mature units can yield less accurate, potentially misleading measures of changes in economic activity. As a simple example, consider the situation when younger and smaller business units are relatively sensitive to aggregate shocks. In this case, a cost-effective approach to estimating short-term growth rates can require the over sampling of younger and smaller business units, and there is tension between a sample design optimized for the level of activity and one optimized for the growth rate. More important, the traditional focus on larger and more mature units limits our ability to measure and study the early lifecycle dynamics of businesses and to evaluate theories of business formation, selection and growth. . . .

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Steven J. Davis is the William H. Abbott Professor of International Business and Economics at the University of Chicago's Graduate School of Business. John Haltiwanger is professor of economics at the University of Maryland. Ron S. Jarmin, C. J. Krizan, Javier Miranda, and Alfred Nucci are with the U.S. Census Bureau's Center for Economic Studies. Kristin Sandusky is with the U.S. Census Bureau's Longitudinal Employer-Household Dynamics Program.

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About the Author

 

Steven J.
Davis
  • Steven J. Davis studies unemployment, job displacement, business dynamics, the effect of taxes on work activity, and other topics in economics. He is deputy dean for the faculty and professor of international business and economics at the University of Chicago Booth School of Business, a research associate at the National Bureau of Economic Research, and an economic adviser to the U.S. Congressional Budget Office.  He previously taught at Brown University and MIT.  As a visiting scholar at AEI, Mr. Davis studies how policy-related sources of uncertainty affect national economic performance.

  • Phone: 773-702-7312
    Email: sdavis@aei.org

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