The Appalachian Economy,

Establishment and Employment Dynamics, 1982-1997: 

Evidence from the Longitudinal Business Database

Lucia Foster

Bureau of the Census

Center for Economic Studies

May 12, 2003

 

______________________________________________________________________________

This research was conducted under contract to the Appalachian Regional Commission. The analysis and 

results presented in this paper are attributable to the author and do not necessarily reflect concurrence by 

the Center for Economic Studies or the U.S. Census Bureau. This paper has undergone a more limited 

review by the Census Bureau than its official publications, and has been screened to ensure that no 

confidential data are revealed. The author thanks Greg Bischak, Tim Dunne, Brad Jensen, John 

Haltiwanger, Ron Jarmin, and Javier Miranda for their helpful advice.
Executive Summary 

The objective of this report is to describe the Appalachian Region’s economy in terms of the entry and 

exit of establishments and their wage and employment dynamics and to compare these to the rest of the 

U.S. economy from 1982 to 1997. While the report provides a detailed description of the entire 

economy of Appalachia, special attention is paid to the producer services portion of the economy. 

Producer services are services sold primarily to other establishments to be used as inputs in production 

and include such activities as financial services, insurance and real estate services, advertising, building 

maintenance services, equipment rentals, employment services, computer and data processing services, 

legal services, engineering, and management. Producer services are an increasingly important 

component of the U.S. economy. In addition, the three subregions of Appalachia are also analyzed. The 

main results of the four levels of comparison can be summarized as follows: 

Comparing Appalachia to the U.S. for the Total Economy 

ß Wages, as measured at the establishment level, are about 10 percent lower in 

Appalachia than in the United States, even when controlling for differences in industry 

composition and other characteristics across the two areas. This wage discrepancy has not 

narrowed over the time period studied.

ß Establishment birth and death rates are lower in Appalachia than in the United 

States (a difference that has not decreased over time). The lower birth and death rates for 

Appalachia are apparent in most industries in the economy except in mining (and to a lesser 

extent manufacturing and construction). The lower birth and deaths rates relative to the U.S. 

are especially noticeable in the Finance, Insurance, and Real Estate (FIRE) and Service 

sectors.

ß Establishment entrants in Appalachia are smaller and pay lower wages than do 

their counterparts in the rest of the U.S. Similarly, establishment exiters in Appalachia 

are smaller and pay lower wages than do their counterparts in the rest of the U.S. The wage 

gap for entrants is only slightly lower than it is for exiters and for continuing establishments.

ß Job creation and destruction rates had a slight downward trend over the study 

period for both the U.S. and Appalachia. Job creation and destruction rates are lower in 

Appalachia than in the U.S. The U.S. job creation rate exceeds 45 percent, while the 

Appalachian job creation rate is 43 percent in all three time periods. Similarly, the U.S. job 

destruction rate is about 35 percent, while the Appalachian job destruction rate is about 33 

percent. Even when controlling for industry, branch activity, year, and size differences, job 

creation rates are 1.2 percentage points lower and job destruction rates are 3.4 percentage 

points lower in Appalachia relative to the rest of the U.S.

Comparing Appalachia to the U.S. for Producer Services 

ß Wages in Appalachia in the producer services sector are about 16 percent lower 

than those in the same sector for the rest of the U.S., even when controlling for other 

differences between Appalachia and the U.S. Thus, the wage gap is larger in producer 
services than in the rest of the economy. However, in contrast to the economy as a whole, 

this gap narrows over the study period. 

ß Establishment birth rates are higher and death rates are lower in producer services 

relative to the economy as a whole for both the U.S. and Appalachia. Nevertheless, 

the establishment birth and death rates are still lower in Appalachia than they are in the rest 

of the U.S. Wages at newly entering establishments are 18 percent lower than their U.S. 

counterparts. This wage gap for entrants is even higher than it is for the total economy.

ß A similar pattern emerges on the employment margin. Net employment growth in 

producer services is strong in both the U.S. and Appalachia over all the time periods. 

Underlying these strong growth rates, is greater establishment and employment churning in 

the U.S. relative to Appalachia.

Comparing Subregions of Appalachia to the U.S. for the Total Economy

ß Compared to the rest of the U.S. the Central subregion’s wages are about 20 

percent lower, and Northern and Southern subregion’s wages are about 10 percent 

lower, on average, over the study period, even when controlling for differences in industry, 

size, and branch activity. Only the Central subregion’s wage gap has improved over the 

study period. 

ß The Southern subregion has the highest birth rate of establishments, followed by 

the Central and Northern subregions. The death rates for the Northern and Southern 

subregions are relatively similar. The wage gaps for employees at entering establishments 

are roughly the same for the Northern and Southern subregions but only when controlling 

for other differences. Otherwise, the wage gap is larger for the North.

ß Net employment growth in the Southern subregion has fared well. When controlling 

for differences in industry, the Central subregion’s net employment growth rate is actually 

higher than the growth rate for the rest of the U.S. This is not the case for the Northern 

subregion, which suggests that the Northern subregion’s problems are more diverse than the 

Central subregion’s over-reliance on slow growth industries. The Southern subregion’s 

establishment birth and death rates, and job creation and destruction rates are more closely 

aligned with those of the U.S. as a whole than are either of the other two subregions. When 

controlling for other factors, the Northern subregion’s low net employment growth relative 

to the rest of the U.S. results from low job creation rates.

Comparing Subregions of Appalachia to the U.S. for Producer Services

ß The Southern subregion has very high birth rates relative to the other subregions. 

As was the case in general, the Southern subregion appears to enjoy especially strong net 

employment growth in producer services. Underlying the net employment growth are strong 

job creation rates.
1

1. Introduction

The general consensus, based on studies of the Appalachian Region’s socioeconomic health, is that the 

region has made great progress in some areas since the Presidential Commission first studied the area in 

1964, but that the region still lags behind the rest of the United States in a variety of dimensions. This 

report focuses on the economic health of the region, specifically on the ability of the region to reallocate 

resources in response to changing economic conditions. 

Three Major Focuses of the Report: 

1. Reallocation Activity in Appalachia

2. The Importance of Strong Producer Services

3. Accounting for the Heterogeneity of the Region 

The U.S. economy has undergone tremendous changes in the last twenty years. One of the major 

changes has been a shift in economic activity away from the manufacturing sector to the trade, service, 

and financial sectors. This shift has necessarily involved the large-scale reallocation of economic activity. 

More generally, growing empirical literature in economics documents the tremendous amount of 

ongoing reallocation in the U.S. economy. One question is whether the Appalachian Region, which has 

historically relied heavily on the manufacturing sector, has also experienced this shift in economic 

activity. 

This report addresses the question of whether the Appalachian Region experiences the same type of 

ongoing reallocation activity as the U.S. economy does. Using the newly developed Longitudinal 

Business Database (LBD), this report documents the reallocation of activity across establishments and 

across jobs in Appalachia and the U.S. One of the concerns about the reallocation of economic activity 

across establishments and jobs is whether the new establishments and created jobs have high or low 

wages. This concern has great resonance in the Appalachian Region, which has historically struggled 

with very low-income rates. This report also addresses this question. 

A second focus of the report reflects the school of thought in regional economics literature that 

emphasizes the importance of the producer services sector for a region’s growth. Many articles have 

argued that the presence of producer services can explain growth differentials across geographic 

locations as well as differing growth and productivity rates for industrial activities. Beyers (1989) notes 

that “the producer services have emerged as an important new key sector, joining agriculture, mining, 

and manufacturing as an important basic component of regional economies (p. ii).” Goe (1996) offers a 

review of the literature concerning the impact of producer services industries on a region, including 

producer services growing role in inter-regional trade. 

With the broad scope of data, this report provides a detailed description of producer services in 

Appalachia compared with the U.S. The basic features of this sector of the economy, such as the 

number of establishments and employees, are described and the wage dynamics and establishment and 

employment reallocation patterns are examined. Although it is beyond the scope of this report to test the 

hypothesis that producer services are essential for the economic health of a region, the development of 
2

the LBD clearly holds the promise that this hypothesis could be tested. 

A third focus of the report is to account for the heterogeneity of the Appalachian Region. The 

Appalachian Regional Commission (ARC) divides the region into three subregions based on the location 

of the county: Central, Northern, and Southern. Numerous studies have found that the Southern 

subregion has experienced more positive outcomes compared to the other two subregions in several 

ways. These studies have also found that Northern subregion appears to have declined over time while 

Central subregion has remained mostly unchanged. 

Isserman (1996) summarizes these differences: “Central Appalachia has the most poverty, and Northern 

Appalachia the least growth (p.13).” In his study of the manufacturing sector of Appalachia, Jensen 

(1998) finds that “there is considerable variation within the Region, with the South experiencing the most 

favorable outcomes over the period and the North slipping relative to the national experience (p.i).” 

More specifically, Jensen (1998) finds that relative to the U.S., the Northern subregion has lower entry 

rates and increasingly lower wages and productivity, the Central subregion has higher entry rates and 

lower (but relatively unchanged) wages and productivity, and the Southern subregion has higher entry 

rates and lower (but less so) wages and productivity. Accordingly, this report examines the reallocation 

dynamics of these three subregions and compares them to the U.S.

Four Major Themes Emerge 

1. The Appalachian Region experiences far less reallocation of establishments and 

employment than the U.S. does. 

This is evident in the lower establishment formation and attrition rates, and the lower job creation and 

destruction rates. This is partly due to the industry composition of Appalachia, but differences in industry 

composition do not explain all of the differences. The over-reliance on branch activity apparent in other 

studies is not as apparent here, and does not seem to greatly explain the differences in reallocation rates. 

The Brandow Company has also examined these issues in Appalachia. Brandow (2001) summarizes 

their findings as “Appalachia had done well in retaining existing firms, but remains caught in a cycle of 

low levels of entrepreneurship, low growth among existing firms, and a continued over-reliance on 

branch facilities (p. 24).” The results in this report strengthen the view that Appalachia lacks sufficient 

economic vitality. 

2. Low wages continue to be a problem in the Appalachian Region. 

Wages are about 10 percent lower in Appalachia than in the U.S., even when controlling for differences

in industry composition and other establishment characteristics across the two areas. This wage 

discrepancy has not narrowed over the time of the study. Wages at newly entering establishments are 

10 percent lower than their U.S. counterparts, even when controlling for other differences. The wage 

gap is most apparent in the Central subregion. Compared to the rest of the U.S. on average over the 

study period, the Central subregion’s wages are about 20 percent lower even when controlling for 

differences in industry, size, and branch activity. However, the Central subregion’s wage gap has 
3

improved over the study period. In contrast, the Northern and Southern subregions’ wages are about 

10 percent lower—a gap relatively constant over the study period. 

3. The producer services sector fares better than the rest of the economy in some dimensions 

but worse in other dimensions.

While the job creation rates are higher in this sector, the gap between the wages for Appalachian 

employees at establishments in Appalachia as compared to employees at establishments in the rest of 

the U.S. is much larger. This wage gap is even higher still for new establishments in producer services.

4. The three subregions of Appalachia are tremendously heterogeneous. 

The Central subregion most closely approximates the conventional view of Appalachia, where most of 

its activity is in non-metropolitan areas and relies on mining and manufacturing. In much of the analysis, 

the results for Central subregion change dramatically for the better once industry controls are applied. 

Yet industry composition is not the whole story. For example, the Central subregion suffers from low 

wages even when controlling for industry differences. 

The Northern subregion seems to face a different set of concerns. Here the establishment birth rates and 

job creation rates are markedly low. Controlling for industry mitigates some of this, but nevertheless the 

Northern subregion seems to lack economic vitality that encourages establishment births and job 

creation. On the other hand, the wage gap in the North is not as severe as it is for the Central subregion. 

Finally, the Southern subregion is most similar to the rest of the U.S. This subregion’s net employment 

growth rates exceed those of the rest of the U.S. When controlling for other differences, it is apparent 

that this is partly due to high job creation rates and low job destruction rates. Nevertheless, wages in the 

Southern subregion are still lower than the wages in the rest of the U.S. The wage gap for the Southern 

subregion is about 10 percent, even when controlling for other differences. This gap is relatively steady 

over the study period.

The report is organized as follows: 

Section 1: Introduction 

Section 2: Discussion of measurement issues and the data used in the study.

Section 3: Comparison of the Appalachian Region with the U.S. over the entire economy. The section is 

divided into three subsections. 

1. Describes the overall characteristics of the comparison areas. The differences that are 

uncovered motivate the structure of the analyses in the subsequent sections. For example, the 

differences in industry composition described in the first subsection are controlled for in the 

subsequent subsections when analyzing establishment and employment dynamics. 

2. Examines establishment births and establishment deaths. 

3. Extends the dynamic analysis to the margin of job creation and job destruction. This three-part 
4

format is used in each of the subsequent sections. 

Section 4: The comparison is narrowed to the producer services sector of the economy. 

Section 5: The economies of the three subregions of Appalachia are compared to the U.S. 

Section 6: The focus is narrowed again to the producer services sector, where producer services 

sectors in the three subregions are compared to the sectors in the U.S. 

Section 7: Concluding remarks.
5

2. Data and Measurement Issues

The data used in this study are from the Longitudinal Business Database (LBD), a recently developed 

establishment-level database linking the Census Bureau’s business register list (the Standard Statistical 

Establishment List).1 As such, the data cover nearly all of the non-farm private U.S. economy. The 

researchers who developed the LBD supplemented the Census longitudinal numeric identifiers with 

name and address matching to ensure the highest quality links over time (and thus avoid spurious 

establishment births and deaths). 

The LBD contains information on location, industry classification, parent firm, employment, and payroll. 

Employment data on the LBD is measured as employment at the establishment during the pay period 

that includes March 12th. Payroll data on the LBD is measured as annual non-farm payroll derived from 

the wages and salaries of employees at an establishment. From these data, we create an annual measure 

of wages: annual payroll divided by (March 12th) employment. The LBD does not contain information 

on hours and thus establishment-level wages cannot be adjusted for variation in hours. Thus the wage 

measure is an approximation of the average wage earned at an establishment. 

After carefully analyzing all years in the LBD, a decision was made to use data only in years covered by 

an Economic Census (specifically, 1982, 1987, 1992, and 1997), to maintain high data quality. 

Similarly, the study includes data only for establishments covered by an Economic Census. Thus 

establishments in agriculture, forestry, fishing, railroads, educational establishments, labor unions, 

religious or political organizations, and government are all excluded (see Data Appendix, section A1.1 

for a more complete discussion). 

In addition to these two constraints, the LBD data were edited over two dimensions. First, missing 

industry codes were filled in where possible using data from non-Census years (see section A1.2 for a 

discussion). Second, data that appeared suspicious in terms of employment size of new establishments 

and magnitude of wages were deleted (see section A1.3 for a discussion). The final dataset consists of 

approximately six million establishments and 87 million employees in each census year.

To consistently measure births and deaths at establishments and in terms of employment flows, births 

and deaths are designated based upon establishment employment. The status of an establishment is 

defined for a pair of years (1982-87, 1987-92, and 1992-97) based on the values of employment in 

those two years. 

The rules are as follows: 

1) Births have zero employment in the start year and positive employment in the end year. 

 

1

 For a more detailed description of this database, see “The Longitudinal Business Database” by 

Ron Jarmin and Javier Miranda (2002), available at http://www.ces.census.gov/ces.php/papers.
6

2) Continuers have positive employment in both the start and end years. 

3) Deaths have positive employment in the start year and zero employment in the end year. Since 

employment is measured as of the week including March 12 and payroll is measured as an 

annual average, there are many establishments with zero employment but positive payroll (see 

section A1.4 for a discussion of the impact of designation rules). Finally, because the focus is on 

five-year intervals, these measures will by construction miss any establishments that are created 

and then destroyed within the five-year interval. The pooled paired-census years dataset 

consists of over 21 million observations. 

As noted above, much of the analysis is for establishment dynamics over five-year intervals. Two of the 

three five-year intervals are periods of economic expansion in the U.S. (1982-87 and 1992-97). The 

remaining interval, 1987-92, encompasses a recession and the early part of the recovery. 

The comparisons of general economic trends in this report are for Appalachia (or its subregions) 

compared with the U.S., since the U.S. is the most meaningful base of comparison. When using 

econometric techniques to compare the differences between Appalachia and the U.S., the comparison 

is for Appalachia and the rest of the U.S. The estimation specifications for these comparisons are 

discussed in the Methodology Appendix with appropriate cites in the main text. 

To allow for easier comparisons across the four main sections of the report, figures with similar 

concepts are produced with the same scales, wherever possible.
7

3. Comparison of Appalachia to the U.S. for the Entire Economy 

The Appalachian economy is compared to the rest of the U.S. economy in this section. Section 3.1 

compares the geography, industry distribution, branch activity, establishment size, and wages of the two 

economies. Section 3.2 examines the two areas’ economic dynamics in terms of their establishment 

births and deaths. Section 3.3 extends this analysis of dynamics by examining the employment flows.

3.1 Characteristics of Appalachia

The Appalachian Region, as defined in Fiscal Year 2002 by Congress for the Appalachian Regional 

Commission (ARC), consists of 406 counties in 13 states running from New York to Mississippi.2

There are approximately six million establishments and 87 million employees in the U.S. and 400,000 

establishments and six million employees in the Appalachian Region on average in the dataset. 

Figures 1A and 1B show employment and the number of establishments in the U.S. (left-scale) and the

Appalachian Region (right-scale) for each census year.3 As is evident from the figures, employment and 

the number of establishments are growing over time for both areas. The number of establishments 

increases by 30 percent for both the U.S. and Appalachia, while employment increases by 40 percent 

for the U.S. and 34 percent for Appalachia from 1982 to 1997. The characteristics of Appalachia are 

described in the next subsections.

3.1.1. Appalachia is relatively rural. 

The common perception of the Appalachian Region is of a relatively rural area. According to ARC, 42 

percent of the population in Appalachia lives in rural areas, compared with 20 percent for the U.S. 

However, while metropolitan areas account for only 28 percent of the counties, these areas account for 

about 60 percent of establishments and 65 percent of employment in Appalachia. The LBD does not 

have a measure of metropolitan and non-metropolitan areas; thus, it is not possible to control for these 

differences in the analysis. Instead, metropolitan and non-metropolitan areas of Appalachia are 

compared to each other (rather than to their the U.S. counterparts) where possible.

 

2

 These counties are based on the Bureau of Economic Analysis FIPS codes that yield 406 counties in 

Appalachia, compared with the Census FIPS codes, which yields 414 counties and independent cities to cover the 

same geography. Although Appalachia consisted of 399 counties (BEA convention vs. 404 for the Census method) 

over much of the sample period, the definition of Appalachia used in this paper is fixed at 414 counties based on the 

Census method.
8

Figure 1-A. Establishment Trends in U.S. and Appalachia, 1982-1997

Establishments

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

1982 1987 1992 1997

300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

700,000

US

AR

Figure 1-B. Employment Trends in U.S. and Appalachia, 1982-1997

Employment

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

110,000,000

1982 1987 1992 1997

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

11,000,000

US

AR
9

Figure 2-A. U.S. Employment Trends by Sector, 1982 and 1997

U.S. Employment

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

Mining

Constr.

Manuf.

Transp.

Whole

Retail

FIRE

Services

1982

1997

Figure 2-B. Appalachian Employment Trends by Sector, 1982 and 1997

Appalachia Employment

0

500000

1000000

1500000

2000000

2500000

Mining

Constr.

Manuf.

Transp.

Whole

Retail

FIRE

Services

1982

1997
10

3.1.2. Industry Shifts Away from Traditional Sectors in Appalachia 

The Appalachian Region has historically been reliant on mining, agriculture, and manufacturing for 

economic activity. However, economic activity in the U.S. shifts away from these sectors during the 

period of this study. A similar shift in economic activity for Appalachia is apparent in Figures 2-A and 2-

B, which show the distribution of employment by industry for the U.S. and Appalachia at the start and 

end of the sample period. Employment in services and retail trade grow steadily over time both in the 

U.S. and in Appalachia. An examination of the years 1982 to 1997 (not shown) reveals the 

manufacturing sector was dominant in the U.S. until 1982, but dominant in Appalachia until 1992. In 

terms of establishments (not shown) from 1982 to 1997, the service sector dominates the U.S., and 

dominates Appalachia starting in the 1990s. 

The industry distributions suggest that the changes in industry composition are similar for Appalachia and 

the U.S. However, important differences between Appalachia and the U.S. can be seen by looking at 

the location quotient (the ratio of the share of employment in an industry in Appalachia to the share of 

employment in the same industry in the U.S.). When the location quotient is greater than one, the share 

of employment in an industry in Appalachia is disproportionately large relative to the U.S. The location 

quotient for each of the census years in the study is shown in Figure 3. 

Figure 3. Appalachian Employment Share by Sector Compared to U.S., 1982-1997

Location Quotients by Sector

0

0.5

1

1.5

2

2.5

3

Mining

Constr.

Manuf.

Trans.

Whole

Retail

FIRE

Services

1982

1987

1992

1997

Not surprisingly, the location quotient for mining is significantly greater than one every year. 

Manufacturing also has a location quotient greater than one for Appalachia. Appalachia’s shares of 
11

employment in construction and retail trade become greater than the U.S. shares over time. The location 

quotient is strikingly low for the FIRE sector. As will be seen in the analysis of establishment and 

employment dynamics, the difference in the industry distribution between Appalachia and the U.S. 

impacts many of the comparisons.

Manufacturing Sector

To recognize the historical importance of the manufacturing sector in Appalachia, this section provides 

more details about manufacturing. 

The number of establishments in manufacturing increases over the sample period by about 20 percent in 

the U.S. and by about 30 percent in Appalachia. Employment in manufacturing falls at the start of the 

sample period and then increases. The turnaround in employment in manufacturing occurs first in 

Appalachia (some time between 1987 and 1992) and later in the U.S. (between 1992 and 1997). On a 

net basis, however, employment in manufacturing fell by 3 percent for both the U.S. and Appalachia 

between 1982 and 1997. 

There is more employment in durable manufacturing than in nondurable manufacturing for both areas, 

though this difference is slightly more pronounced in the U.S. than in Appalachia. The employment 

decline in manufacturing for the U.S. is almost entirely in the durable sector, while for the Appalachia the 

decline is almost entirely in the nondurable sector.

The manufacturing sector contains twenty major groups.4 Figures 4-A and 4-B show the employment 

for each of these industry groups at the beginning and end of the sample period for the U.S. (upper 

panel) and for the Appalachian Region (lower panel). To ease comparison across the U.S. and 

Appalachia, the scale for Appalachia is one-tenth that of the U.S. The figures show that the relative size 

and time series patterns of most Appalachian industries are similar to their U.S. counterparts. However, 

some industries are strikingly different over the two areas. 

Moving from left to right, the first most obvious difference is that the textile industry is relatively much 

larger in Appalachia than in the rest of the U.S. (though both areas experienced declines in employment 

in these industries). Apparel is relatively more important in Appalachia at the start of the sample period, 

but the declines in employment seen in both the U.S. and Appalachia are much more dramatic in 

Appalachia. Employment in lumber grows for both the U.S. and Appalachia, but the increase is more 

dramatic in Appalachia. Like employment in apparel, employment declines in primary metals for both 

the U.S. and Appalachia, but the decline in Appalachia is far more dramatic. Finally, employment in the 

industrial machinery and transport equipment industries falls in the U.S. but rises in Appalachia over the 

sample period.

 

4

In order to avoid disclosure problems, the tobacco industry group (SIC 21) is combined with the foods, 

feeds, and beverages group (SIC 20) in all of the analysis that follows. 
12

Figure 4-A. U.S. Manufacturing Employment by Sector, 1987 and 1997

U.S. Manufacturing Employment

0

500000

1000000

1500000

2000000

2500000

Food

Textile

ApparelLumber 

Furniture

Paper

Printing

Chemicals

Petroleum

Rubber

Leather

Stone

P. Metals

F. Metals

Ind. Mach.

El. Mach.

Transport.

Instrument

Misc.

1982

1997

Figure 4-B. Appalachian Manufacturing Employment by Sector, 1982 and 1997

AR Manufacturing Employment

0

50000

100000

150000

200000

250000

Food

Textile

ApparelLumber 

Furniture

Paper

Printing

Chemicals

Petroleum

Rubber

Leather

Stone

P. Metals

F. Metals

Ind. Mach.

El. Mach.

Transport.

Instrument

Misc.

1982

1997
13

3.1.3. Employment Activity of Branch Locations 

The LBD contains information on whether the establishment is part of a single-unit firm or is part of a 

multi-unit firm. Jensen (1998) found that manufacturing multi-unit establishments in Appalachia tend to 

pay higher wages (and have higher productivity) than single unit 

establishments. Davis, Haltiwanger, and Schuh (1996) found that in manufacturing, multi-unit 

establishments experience less employment churning relative to single unit establishments. Thus, whether 

the share of multi-unit activity in Appalachia is comparable to that of the U.S. is interesting. The shares 

are in fact very similar. For years 1982 to 1997, approximately 25 percent of establishments in the U.S. 

are part of a multi-unit firm and employ about 60 percent of all employees. These shares increase only 

slightly over the time period of the study. The shares of multi-unit establishments and employment are 

only slightly higher in the Appalachian Region.

3.1.4. Establishment Size

The size of an establishment (as measured by the number of its employees) reveals something about the 

preferred scale of operation and the technology of the establishment. Concerning employment dynamics, 

the existing literature shows that employment churning decreases as establishment size increases.5 The 

average size of establishments in the U.S. rises to 16 employees in 1997 from 14 employees in 1982. 

The median U.S. establishment has four employees over this time period. The average size of 

establishments in Appalachia is about the same as that for the U.S. (slightly higher in two of the years, 

and slightly lower in the other two years). The median size of establishments in Appalachia is the same 

as that for the U.S. for all four years. If attention is restricted to establishments with positive 

employment, the averages and medians are slightly higher but the relationship between the U.S. and 

Appalachia remains the same. 

The measure of size typically used for employment flows is employment averaged over the start and end 

period for establishments that have positive employment in either period. (This measure will be referred 

to as the flows measure of size in the rest of the report.) Using this flows measure of size, establishments 

in Appalachia are about 1 percent larger than those in the rest of the U.S. (see section A2.1 in the 

Methodology Appendix for a description of the specification used to estimate these differences). 

However, when controlling for differences in industry distribution, years, and branch activity, 

establishments in Appalachia are slightly smaller than those in the U.S. (about 4 percent smaller). As 

will be discussed later in this report, controlling for differences in the composition of birth, death, and 

continuer establishments in Appalachia versus the U.S. also affects the differences in size between the 

two areas. 

3.1.5. The Gap in Wages Between Appalachia and the United States 

 

5

 See Davis, Haltiwanger, and Schuh (1996) for evidence from the manufacturing sector and Foster, 

Haltiwanger, and Krizan (2002) for evidence from the retail trade sector.
14

A persistent concern for Appalachia is the gap between the region’s wages and the wages in the rest of 

the U.S. For example, the average wage for employees in the U.S. in 1982 is $16, while for Appalachia 

it is $15. In 1997, the average wage for the U.S. is $29, while for Appalachia it is $24.6 One of the 

concerns about the reallocation of economic activity across establishments and jobs is whether the new 

establishments and jobs have high or low wages. This question is examined later. 

Table 1 shows the differences in wages for establishments in Appalachia versus the rest of the U.S. (see 

A2.2 for details on the estimates). As can be seen from the first row, wages in the Appalachian Region 

are about 10 percent below those for the rest of the U.S. This wage gap does not narrow over the time 

period. This wage gap may, in part, reflect differences in the industry, branch activity, and size 

composition of establishments in Appalachia compared with the U.S. The second row of Table 1 shows 

the wage gap when controlling for differences in these characteristics. Notice that controlling for 

differences in characteristics does not uniformly narrow the wage gap (compare rows 1 and 2 at each 

point in time). Industry control is the most influential, suggesting that changes in industry composition are 

affecting wages. Controlling for industry might widen the wage gap in the early part of the sample when 

employment in Appalachia was more concentrated in manufacturing compared with the rest of the U.S. 

Manufacturing traditionally has higher wages compared with other sectors of the economy. As 

manufacturing becomes less important in Appalachia, some of the wage advantage of the industry 

composition differences disappears so that the wage gap controlling for other factors is smaller than 

when not controlling for these differences.

Table 1: Wage Comparison (Differences Between Appalachia and Rest of U.S.)

Type of 

Comparison

1982 1987 1992 1997

Average 

Employee 

-0.10 -0.09 -0.12 -0.13

Controlling for 

other Factors*

-0.12 -0.10 -0.11 -0.11

* The factors are industry, branch activity, and establishment size.

All differences are statistically significant.

3.2 Establishment Births and Deaths

An indicator of the general economic health of an economy is the rate at which establishments are 

opening and closing. Accordingly, the first analysis of the dynamics of the Appalachian economy 

concerns the birth and death rates of establishments. (See section A2.3 of the Methodology Appendix 

for how these rates are calculated.) Carefully interpreting the results of the comparison between the 

U.S. and Appalachia is important, since the pace of reallocation will also reflect differences in shocks 

that the two areas face. Figure 5 shows the establishment birth and death rates for the U.S. and for 

 

6

 In 1982, the median wage for the U.S. $14 while for Appalachia it is $13. In 1997, the median wage for the 

U.S. is $24 while for Appalachia it is $21. 
15

Appalachia. Both areas see a decline in establishment birth rates, and to a lesser extent, establishment 

death rates. The establishment birth rates are lower in Appalachia than in the U.S. The difference 

between the two rates narrows slightly for 1987-92 but is about the same size over the time period. The 

establishment death rates are lower in Appalachia than in the U.S., but the gap widens between 

Appalachian and U.S. rates after the first period.

Figure 5. Establishment Birth and Death Rates for U.S. and Appalachia, 1982-1997

Establishment Birth and Death Rates

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

Ar Deaths

Another way to compare the prevalence of establishment births and deaths is to compare the 

probabilities that an establishment is a birth (or death) for Appalachia and the U.S. (see A2.4 for a 

description of how these probabilities are calculated). Note that this comparison is between Appalachia 

and the rest of the U.S. The probability of an establishment being an entering establishment is 0.32 for 

the rest of the U.S. and is 0.31 for Appalachia. Similarly, the probability of an establishment being an 

exiting establishment is 0.25 for the rest of the U.S. and is 0.24 for Appalachia. When differences in 

industry composition, years, establishment size, and branch activity are accounted for, the probability 

that an establishment is a birth is still about 1 percentage point lower for Appalachia. Similarly, when 

controlling for these characteristics, the probability that an establishment is a death is again about 1 

percentage point lower for Appalachia. 

3.2.1 Birth and Death Rates by Industry

The analysis above has shown that the establishment birth and death rates for the total economy for 

Appalachia are consistently below those for the U.S. The analysis in this section examines how these 

rates compare by sectors of the economy. Figures 6A-6H show the establishment birth and death rates 
16

for Appalachia and the U.S. for each sector of the economy. In contrast to all of the other sectors of the 

economy, the birth and death rates for mining in Appalachia exceed those in the U.S. in every period 

(except the death rate in the last period). For construction, the death rates for Appalachia are similar to 

those for the U.S., but the births rates for Appalachia are lower than for the U.S. (although by the end 

of the period, the birth rates are almost identical). And for manufacturing, the birth rates for Appalachia 

are close to those for the U.S., but the death rates are lower in Appalachia, compared to the U.S. (see 

below for more details). Interestingly, the birth and death rates of establishments in Appalachia are 

lower than those for the U.S. in wholesale trade, retail trade, FIRE, and services. The largest 

discrepancy between Appalachia and U.S. birth and death rates occurs in the FIRE sector. Another 

large discrepancy is in the Service sector. FIRE and service sectors are the two sectors of the economy 

in which producer services are located.

Figure 6-A. U.S. & Appalachian Mining Establishment Birth & Death Rates

Mining

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths

Figure 6-B. U.S. & Appalachian Construction Establishment Birth & Death Rates

Construction

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths
17

Figure 6-C. U.S. & Appalachian Manufacturing Establishment Birth & Death Rates

Manufacturing

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths

Figure 6-D. U.S. & Appalachian Transportation Establishment Birth & Death Rates

Transportation

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths
18

Figure 6-E. U.S. & Appalachian Wholesale Establishment Birth & Death Rates

Wholesale Trade

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths

Figure 6-F. U.S. & Appalachian Retail Establishment Birth & Death Rates

Retail Trade

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths
19

Figure 6-G. U.S. & Appalachian FIRE Establishment Birth & Death Rates

FIRE

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths

Figure 6-H. U.S. & Appalachian Services Establishment Birth & Death Rates

Services

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths

3.2.1.1 Birth and Death Rates in the Manufacturing Sector

As noted above, the birth rates for manufacturing in Appalachia are close to those for the U.S., but the 

death rates are lower in Appalachia. Figure 7 shows the establishment birth and death rates for 

manufacturing disaggregated into nondurable and durable subsectors. In the nondurable sector, the 

establishment birth and death rates are lower for Appalachia than for the U.S. Over the sample period, 

the nondurable establishment birth rates for Appalachia are falling and diverging from the U.S. rates, 
20

while the death rates for Appalachia are rising and converging to the U.S. death rates. In the durable 

sector, the death rates are lower for Appalachia than for the U.S., but the birth rates are higher for 

Appalachia than for the U.S. The durable establishment birth and death rates are falling for both the 

U.S. and Appalachia over the sample period. The difference between the two areas’ rates for durables 

remains relatively constant over the time period (apart from the 1987-92 period). In sum, the similarity 

of the birth rates for the U.S. and Appalachia at the manufacturing level masks interesting differences at 

the subsector level. 

3.2.2 Birth and Death Rates by Appalachian Metropolitan and Non-Metropolitan Areas

The birth rates for metropolitan and non-metropolitan areas in Appalachia are nearly identical, with nonmetro birth rates slightly lower than metro birth rates. On the other hand, death rates for non-metro 

areas are higher than for metro areas in Appalachia. This gap between the death rates for metro and 

non-metro areas in Appalachia is relatively wide at the start of the study period, but narrows over time.

3.2.3 Characteristics of Births and Deaths in Appalachia

Having established that the birth and death rates are lower in Appalachia than in the U.S., this section 

expands the analysis to see whether the births and deaths in Appalachia are qualitatively different from 

their U.S. counterparts. Jensen (1998) finds that for manufacturing, new entrants in Appalachia have 

lower wages and lower productivity than their counterparts in the rest of the U.S., even when controlling 

for differences in industry mix. In addition Jensen (1998) finds that for manufacturing, new entrants in 

Appalachia are larger than new entrants in the rest of the U.S.

Existing literature shows that new establishments are smaller and pay lower wages than continuing 

establishments. The LBD data confirm this: for the U.S. as a whole, the average birth establishment has 

11 employees while the average continuing establishment for the same years has 21 employees. The 

average birth establishment pays $20 while the average continuing establishment for the same years pays 

about $23. Similarly, the average death establishment has 11 employees while the average continuing 

establishment for the same years has 20 employees. The average death establishment pays $15 while 

the average continuing establishment for the same years pays about $20. 7 Thus the comparisons here 

are for Appalachia versus the U.S. holding the status of the establishments constant (birth, death, or 

continuer).

 

7

 Continuing establishments used for comparison differ for births and deaths because they cover different 

years. These births and deaths are not necessarily being observed at the time in which they are occurring. When 

using the preferred measure of size, the average over the two time periods, the differences between births, deaths, 

and continuers will be starker by construction (since the births and deaths are being averaged with zero in one of the 

periods).
21

Figure 7-A. Birth and Death Rates for Nondurable Goods Establishments in the U.S. and 

Appalachia for 1982–1987; 1987–1992; 1992–1997

Nondurable Manufacturing

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths

Figure 7-B. Birth & Death Rates for Durable Goods Establishments in the U.S. and 

Appalachia for 1982–1987; 1987–1992; 1992–1997

Durable Manufacturing

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths
22

3.2.3.1 Wages 

This section compares wages for employees in Appalachia to employees in the rest of the U.S. for all 

the years in the sample, specifically looking at the wages for entering and exiting establishments (see 

A2.5 for a description). Table 2 shows that the average employee at an establishment in Appalachia 

earns 10 percent less than an employee in the rest of the U.S. over the years in the sample (this is the 

pooled year sample analog to the results shown in Table 1). When controlling for differences in 

characteristics for the two areas, this wage gap falls slightly to about 9 percent. When establishments are 

divided up by their status (as entrants, exiters, or continuing establishments), the results show that 

compared with their U.S. counterparts, establishments in Appalachia have wages that are 10 percent 

lower for entrants and 12 percent lower for exiters. Note that the wage differences are generally smaller 

when controlling for differences in other characteristics. 

Thus, not only does Appalachia have lower birth rates than the rest of the U.S., but the births tend to 

have lower wages than their U.S. counterparts, even when controlling for industry and other 

characteristics. It is perhaps hopeful that the exiting establishments have an even larger wage gap than 

do continuers or entrants. 

Table 2: Wages of Births and Deaths Comparison 

(Differences Between Appalachia and Rest of U.S.)

Type of Establishment Type

Comparison

Total Continuers Exiters Entrants

Average 

Employee

-0.10 -0.13 -0.12 -0.11

Controlling for 

other Factors*

-0.09 -0.11 -0.12 -0.10

* Factors include industry, branch activity, year, and size.

All differences are statistically significant.

3.2.3.2 Size of Establishments When Classified as Births, Deaths, or Continuers

As noted above, the average U.S. entering and exiting establishments have 11 employees. The average 

Appalachian entering and exiting establishments are slightly smaller. The total sample of establishments 

showed that establishments in Appalachia are larger than those in the U.S. That entrants and exiters are 

smaller is not inconsistent with the finding that establishments in general are larger (even when noting that 

continuers in Appalachia are also smaller than their U.S. counterparts). The apparent inconsistency 

(each of the three groups of establishments are smaller than their counterparts but the total group of 

establishments in larger than their counterpart) reflects the difference in composition across Appalachia 

and the U.S. There are fewer births and deaths in Appalachia than in the rest of the U.S.; thus, as a 
23

whole, establishments are larger in Appalachia.

 Jensen (1998) found that in Appalachia, the average sizes of entrants and exiters in manufacturing are 

larger than for the rest of the U.S. Since this runs counter to the results noted above for the entire

economy, a consistency check is run that constrains the current analysis to the manufacturing sector. The 

results show that for manufacturing the average size of entrants and exiters in Appalachia are noticeably 

larger than their counterparts in the U.S.8 Thus the apparent contradiction between the current findings 

and Jensen’s earlier results is due to differences in the scope of the analyses (the manufacturing sector 

compared to the entire economy).

Table 3 shows the results of the comparison when using the preferred measure of size—the flows 

measure of size (see A2.6 for description of the estimation specification). There is no significant 

difference in the size of entrants in Appalachia compared to the rest of the U.S. However, exits and 

continuers are slightly smaller in Appalachia than in the rest of the U.S. (about 3 percent and 2 percent, 

respectively). When other controls are used, the differences are a bit starker. Entrants are about 5 

percent smaller and exiters and continuers are about 7 percent smaller in Appalachia than in the rest of 

the U.S.

Table 3: Size of Births and Deaths Comparison (Differences Between Appalachia and Rest of 

U.S.)

Type of Establishment Type

Comparison

Total Continuers Exiters Entrants

Average 

Establishment

0.01 -0.02 -0.03 ** -0.00

Controlling for 

other Factors*

-0.04 -0.07 -0.07 -0.05

* Factors include industry, branch activity, and years.

All differences are statistically significant except that denoted by **.

3.3 Employment Creation and Destruction

Another important indicator of the health of an economy is the number of jobs in the economy. The net 

employment growth rate can tell us much about the health of a region. However, the net employment 

data cannot completely capture the reallocation of employment that occurs within an area. To get a 

complete picture, we also look at the gross employment flows in the areas (see A2.7 for a description 

of how these are calculated). The job creation rate shows the rate at which expanding establishments 

(including entering establishments) add new jobs to the economy. The job destruction rate shows the 

rate at which contracting establishments (including exiting establishments) destroy jobs in the economy. 

The sum of the job creation and destruction rates, measures the total amount of job reallocation that is 

 

8

 The averages for the U.S. are: entrants have 24 emp loyees and exiters have 30 employees. The averages for 

Appalachia are: entrants have 28 employees and exiters have 39 employees.
24

occurring in the economy.

The U.S. and Appalachia have positive net employment growth over all three time periods. The upper 

panel of Figure 8 shows the net employment growth rates for each of the three periods. While the U.S. 

experiences a slow-down in employment growth during the second period, Appalachia experiences 

increasing employment growth over the three periods. Apart from the second period, the net 

employment growth rates for Appalachia are slightly below those for the U.S.

Underlying this positive growth is a significant amount of employment churning. The job creation rate 

exceeds 45 percent and the job destruction rate is about 35 percent for the U.S. in all three time 

periods. The job creation and destruction rates for Appalachia are a bit lower: about 43 percent and 33 

percent respectively. It is possible to break down the job creation rate into its two components and to 

determine the share of job creation due to employment growth at expanding continuing establishments 

and employment growth due to the entry of establishments. Likewise, it is possible to break down the 

job destruction rate into the share of destruction due to employment loss at contracting continuing 

establishments and employment loss due to the exit of establishments. The share of flows that can be 

attributed to births and deaths are about 60 percent for creation and destruction for each of the time 

periods for the U.S. The share of flows that can be attributed to births and deaths for Appalachia are 

very similar to the U.S. shares—they are about 60 percent for creation and destruction for each of the 

time periods. 

The lower panel of Figure 8 shows the job creation and destruction rates for the U.S. and Appalachia. 

The decrease in net employment growth in the U.S. for 1987–1992 is the result of both a decrease in 

job creation rates and an increase in job destruction rates. In contrast, the job creation and destruction 

rates in Appalachia decline over the periods. 

It is possible to measure the differences shown in Figure 8 across all of the years (see A2.8 for the 

specification used in these estimations). Table 4 presents the job flows comparisons. On average across 

all of the years in the study, the Appalachian Region has lower net employment growth (1.6 percentage 

points lower), lower job creation (4.5 percentage points lower), and job destruction (3 percentage 

points lower), thus, lower reallocation than the rest of the U.S. When controlling for industry, firm type, 

size, and years, the Appalachian Region has higher net employment growth than the U.S. (about 2.2 

percentage points higher). The industry control (even at the sectoral level) is responsible for the change 

in rank of Appalachian and U.S. net growth. This is not surprising given that the employment in the 

Appalachian Region falls disproportionately in the Mining and Manufacturing sectors, which have 

negative and low net employment growth, respectively. 

The differences in the job creation rates between Appalachia and the rest of the U.S. are significantly 

narrowed when controlling for differences in characteristics. The difference shrinks from 4.5 percentage 

points to 1.2 percentage points. By contrast, the difference in the job destruction rates widens (slightly) 

when controlling for differences in characteristics. The difference increases from about 3 percentage 

points to 3.4 percentage points.
25

Figure 8-A. U.S. & Appalachian Net Employment Growth

Net Employment Growth

0

10

20

1982-87 1987-92 1992-97

Growth Rates

US NET

AR NET

Figure 8-B. U.S. & Appalachian Job Creation & Destruction Rates

Job Creation and Destruction

20

40

60

1982-87 1987-92 1992-97

Rates

US POS

US NEG

AR POS

AR NEG
26

Table 4: Job Flows Comparison: Differences Between Appalachia and the Rest of the U.S.

Type of 

Comparison

Net 

Employment

Job 

Creation

Job 

Destruction

Reallocation

Aggregate -1.55 -4.53 -2.98 -7.51

Controlling for 

other Factors*

2.24 -1.18 -3.43 -4.61

* Factors include industry, branch activity, year, and size.

All differences are statistically significant.

3.3.1. Job Creation and Destruction Rates by Industry

As has been shown, net employment growth rates are lower for Appalachia when no controls are used, 

but net employment growth rates are higher when industry controls are used. This subsection examines 

in more depth the importance of industry. Figure 9 shows the net employment growth rates by sector for 

the U.S. (top panel) and Appalachia (bottom panel). Some basic similarities exist in the sectoral net 

employment growth rates across Appalachia and the U.S. For both areas, the Service sector has the 

highest net employment rates, while the Manufacturing sector has the second lowest net employment 

rates (after mining). The net employment growth rates for the Retail and Wholesale trade and 

Construction sectors look similar across the U.S. and Appalachia. One of the noticeable differences 

across the two areas is that Manufacturing and Construction appear to have slow downs in net 

employment growth in the U.S. during 1987–1992, while they experience accelerating net employment 

growth in Appalachia during the same period. 

The foregoing analysis has shown that job creation and destruction rates for Appalachia are smaller than 

they are for the rest of the U.S. This subsection examines whether this pattern holds over all sectors of 

the economy. Figure 10 shows the job creation and destruction rates for the U.S. and Appalachia over 

all of the sectors of the economy. The first, most striking, feature of the plots is how similar the 

magnitudes of the creation and destruction rates are in Appalachia and the U.S. For example, notice 

that the distinctive pattern in Construction is evident for both the U.S. and Appalachia. Similarly, in 

Manufacturing, job creation and destruction are relatively low compared to the other sectors for both 

Appalachia and the U.S. (see below for more details). The second most striking feature of the plots is 

that job creation and destruction rates are generally slightly lower for Appalachia than for the U.S. in 

almost every sector (except, as with the establishment birth and death rates, for Mining). The 

discrepancy between the rates in the U.S. and Appalachia is largest in the Wholesale Trade and FIRE 

sectors.
27

Figure 9-A. U.S. Net Employment Growth by Sector

U.S. Net Employment Growth

-10

0

10

20

30

Constr.

Manuf.

Transp.

Whole

Retail 

FIRE

Services

1982-87

1987-92

1992-97

Figure 9-B. Appalachian Net Employment Growth by Sector

Appalachia Net Employment Growth

-10

0

10

20

30

Constr.

Manuf.

Transp.

WholeRetail 

FIRE

Services

1982-87

1987-92

1992-97
28

Figure 10-A. U.S. & Appalachia Mining Job Creation & Destruction Rates

Mining

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG

Figure 10-B. U.S. & Appalachia Manufacturing Job Creation & Destruction Rates

Manufacturing

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG
29

Figure 10-C. U.S. & Appalachia Construction Job Creation & Destruction Rates

Construction

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG

Figure 10-D. U.S. & Appalachia Transportation Job Creation & Destruction Rates

Transportation

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG
30

Figure 10-E. U.S. & Appalachia Wholesale Job Creation & Destruction Rates

Wholesale Trade

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG

Figure 10-F. U.S. & Appalachia Retail Job Creation & Destruction Rates

Retail Trade

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG
31

Figure 10-G. U.S. & Appalachia F.I.R.E. Job Creation & Destruction Rates

FIRE

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG

Figure 10-H. U.S. & Appalachia Services Job Creation & Destruction Rates

Services

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG

3.3.1.1 Job Creation and Destruction Rates in the Manufacturing Sector

As noted above, the job creation and destruction rates for Appalachia in manufacturing are very similar 

to those for the U.S. This section examines whether this similarity holds for the durable and nondurable 

subsectors of manufacturing. Figure 11-A shows the job creation and destruction rates for nondurable 

manufacturing. Generally, the job creation and destruction rates for Appalachia are below those for the 

U.S. but they follow the same time series patterns: job creation rates rise briefly and then fall, and job 

destruction rates fall briefly and then rise. The magnitudes of these changes, however, differ over the 

two areas—by the last period, the job destruction rate for Appalachia exceeds that for the U.S. 
32

Figure 11-B shows the job flow rates for durables. Over the sample period, job creation rates rise (with 

a slowdown in the middle period for the U.S.) and job destruction rates fall for both areas. Again, job 

creation and destruction rates are generally lower in Appalachia than in the U.S. 

In sum, the job creation and destruction rates at the subsector level are relatively similar for Appalachia 

and the U.S. The most interesting differences between the two areas occur between 1987 and 1992, 

where job creation rates rise for all groups except durables in the U.S. and the gap between the U.S. 

and Appalachian job destruction rates is especially large. There is a much more distinct drop in job 

destruction for durables than nondurables, and job creation rates seem to trend upward in durables but 

downward in nondurables. 

3.3.2 Job Creation and Destruction Rates in Metropolitan and Non-Metropolitan Areas of 

Appalachia

The net employment growth rates for metropolitan areas are slightly higher than those for nonmetropolitan areas for all three time periods. The job creation and destruction rates are slightly higher 

for metropolitan areas relative to non-metropolitan areas. Thus, even with the higher net employment 

growth rates, the metropolitan areas still exhibit more job destruction than the non-metropolitan areas. 

Finally, the metropolitan and non-metropolitan job flows rates are converging over time.

Figure 11-A. U.S. & Appalachian Non-Durable Goods

Job Creation and Destruction Rates

Nondurable Manufacturing

20

30

40

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG
33

Figure 11-B. U.S. & Appalachian Durable Goods

Job Creation and Destruction Rates

Durable Manufacturing

20

30

40

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG
34

4. Producer Services in Appalachia Compared with the United States

The producer services sector in Appalachia is compared to its counterpart in the U.S. in this section. 

First, an overall comparison of the sector using data from the LBD is presented. Second, the 

establishment birth and death dynamics across Appalachia and the U.S. are compared. And finally, the 

dynamics analysis is extended to the employment flows margin. In the dynamic analysis where the focus 

is on year pairs, the analysis is restricted to establishments that are classified in producer services in at 

least one of the years in the pair.

4.1 Characteristics of Producer Services

The definition of producer services used in this report is based on the consensus definition that emerges 

from the literature and includes the following industries: banking, nondepository institutions, security 

brokers, insurance carriers, insurance agents, real estate, business services, legal services, and 

engineering and management (see section A1.6 in the Data Appendix for a discussion). 

There are approximately 800,000 establishments with 9.5 million payroll employees in the producer 

services sector in the U.S. in 1982. The number grows to 1.5 million establishments with 19.8 million 

employees by 1997. The percent of employment in the U.S. in this sector grows from 13 percent in 

1982 to 20 percent in 1997. This growth also occurred in the Appalachian Region. There are 

approximately 47,000 establishments with half a million payroll employees in the producer services 

sector in the Appalachian Region in 1982. The number grows to 88,000 establishments with 1 million 

employees by 1997. The percent of employment in Appalachia in this sector grows from 8 percent in 

1982 to 13 percent in 1997. The location quotient for producer services in Appalachia relative to the 

U.S. rises over time from 0.62 in 1982 to 0.68 in 1997. 

4.1.1. Producer Services are Located Primarily in Metropolitan Areas

About two-thirds of all establishments in the producer services sector in Appalachia are in metropolitan 

areas. Thus there are disproportionately more producer services establishments in metropolitan areas 

than in non-metropolitan areas. (Recall about 60 percent of establishments in Appalachia are in 

metropolitan areas).

4.1.2. One-quarter of Producer Services Establishments are Part of a Multi-Unit Firm

The shares of establishments and employment in the U.S. in producer services that are part of a multiunit firm are similar to the shares for the economy at large. That is, approximately 25 percent of all 

establishments in producer services in the U.S. are part of a multi-unit firm and these employ about 60 

percent of all employees. The main difference between the shares for the economy and for producer 

services is that the increase in shares of employment for producer services is more significant than it is 

for the rest of the economy. As with the economy as a whole, the share of multi-unit establishments and 

employment is about the same for the Appalachian Region, especially in the later years. In the early 

years, the employment share is only about 50 percent. 

4.1.3. Average Size of Producer Services Firms in Appalachia is 10 to 11 Employees 
35

The average size of establishments in producer services in the U.S. between 1982 and 1997 is about 12 

employees, while the average size for Appalachia is about 10 to 11 employees. Using the flows measure 

of size reveals that in contrast to the economy as a whole, producer services establishments in 

Appalachia are relatively smaller than for the rest of the U.S., by about 1 percent. When controlling for 

industry, branch activity, and years, this difference is more pronounced—about 4 percent. (See A2.1 

for a description of the specification used to estimate these differences.) 

4.1.4. Wages for Employees in the Producer Services Industry are about 20% lower in the 

Appalachian Region than in the Rest of the U.S.

Recall that the average employee’s wages are about 10 percent lower in Appalachia than in the rest of 

the U.S. This section applies to producer services the same type of wage analysis as was done for the 

total economy (see A2.2 for a description). 

Table 5 shows the percent difference in wages for the average employee in Appalachia compared with 

the rest of the U.S. Wages for employees in the producer services industry are about 20 percent lower 

in the Appalachian Region than in the rest of the U.S.9 This is a larger difference than for the economy 

as whole. When controlling for industry, size, and firm type differences between the U.S. and 

Appalachia, the wages in the Appalachian Region are about 16 percent lower than the rest of the U.S.10

Compared to the economy as a whole, the wage differences are falling slightly over time (compare 

Tables 1 and 5). 

Table 5: Producer Services Wages Comparison, Differences Between Appalachia and 

Rest of U.S.

Type of 

Comparison

1982 1987 1992 1997

Average 

Employee 

-0.08 -0.22 -0.21 -0.20

Controlling for 

other Factors*

-0.08 -0.18 -0.16 -0.15

* The factors are industry, branch activity, and establishment size.

All differences are statistically significant.

4.2 Establishment Births and Deaths for Producer Services

The establishment birth and death rates for producer services in the U.S. and Appalachia are shown in 

Figure 12. The birth rates are higher and the death rates lower for both the U.S. and Appalachia 

relative to their counterparts for the economy as whole (compare to Figure 5). As is true for the 

economy as a whole and for the two sectors in which producer services appear (Services and FIRE), 

 

9

 This is approximately the average difference for 1987–1997. For some reason the employment-weighted wage 

difference is much lower in 1982, but the unweighted wage difference in 1982 does not show such odd behavior.

10 Industry continues to be a control since the producer services sector is made up of many different industries.
36

the establishment birth and death rates for Appalachia are lower than they are for the U.S. As is the 

case for Services and FIRE, this difference seems rather stable over time, in contrast to the economy as 

a whole, in which the difference in death rates appeared to be widening (compare Figures 5 and 12). 

Notice that the death rates in producer services are generally flat (they fall from the first period to the 

second but then rise in the last period); this contrasts with the economy as a whole, in which the death 

rates have a general downward trend (they rise from the first period to the second and then fall in the 

last period). 

Figure 12. Birth and Death Rates for Producer Services in the United States and Appalachia

Establishment Birth and Death Rates

25

35

45

55

65

1982-87 1987-92 1992-97

US Births

US Deaths

AR Births

AR Deaths

The probability that a producer services establishment is an entrant or an exiter can be calculated for 

Appalachia and the rest of the U.S. to give further information on the relative importance of 

establishment churning in the two areas (see A2.4 for a description of the methodology). The probability 

of a producer services establishment being an entering establishment is 35 percent for the rest of the 

U.S. and is 34 percent for Appalachia. Similarly, the probability of an establishment being an exiting 

establishment is 23 percent for the rest of the U.S. and is 20 percent for Appalachia. When controlling 

for differences in characteristics across the two areas, the differences in probabilities increase slightly. 

Comparing births and deaths in producer services to those in the total economy, the difference in 

probabilities for an establishment being an entrant is very similar for the economy as a whole and for 

producer services (the difference is about 1 percentage points in both cases). In contrast, the difference 

in probabilities for an establishment being an exiter is larger in producer services than for the economy 
37

as a whole (the difference is about 3 percentage points for producer services versus 1 percentage point 

for the total economy).11

4.2.1. Birth and Death Rates in Producer Services for Metropolitan and Non-Metropolitan 

Areas of Appalachia

The previous section has shown that birth rates are higher and death rates are lower in producer 

services as compared to the economy as a whole (for both the U.S. and for Appalachia, compare 

Figures 5 and 12). This pattern holds true for both metropolitan and non-metropolitan areas in 

Appalachia. Recall that birth rates in the total economy are very similar for metro and non-metropolitan 

areas. In contrast, in producer services the non-metro birth rates are markedly lower than the metro 

birth rates and this gap widens over time (in the last period, the birth rate for metro is 45 percent, while 

for non-metro it is 40 percent). Another difference between producer services and the total economy is 

that death rates for metro areas are higher than for non-metro areas in Appalachia (whereas in the total 

economy metropolitan death rates were slightly lower than non-metropolitan death rates).

4.2.2 Characteristics of Births and Deaths in Producer Services in Appalachia

The birth rates and especially the death rates are lower in Appalachia than in the U.S. for producer 

services. In this section, these births and deaths in Appalachia are examined to see if they are 

qualitatively different from their U.S. counterparts. 

4.2.2.1 Wages for Producer Services

This section compares wages for producer services employees in Appalachia to their counterparts in the 

rest of the U.S. for all the years in the sample paying particular attention to the wages at entering and 

exiting establishments (see A2.5 for a description). Table 6 summarizes the results of these exercises. 

The average producer services employee in Appalachia earns about 20 percent less than does their rest 

of the U.S. counterpart over the years in the sample (this is the pooled year sample analog to the results 

shown in Table 5). When controlling for differences in characteristics over the two areas, this wage gap 

falls noticeably to 14 percent. This gap is larger than the 9 percent wage gap for the entire economy 

(compare to Table 2). When these establishments in producer services are divided up by their status, 

relative to their rest of the U.S. counterparts, establishments in Appalachia have wages that are 18 

percent lower for entrants and 15 percent lower for exiters. The gap in wages for entrants is strikingly 

high in this sector of the economy (for the general economy the gap was 10 percent).

 

11 This comparison is for the results that do not control for differences in other characteristics.
38

Table 6: Difference in Wages for Entrants and Exiters in Producer Services in Appalachia and 

the Rest of United States 

Type of Establishment Type

Comparison

Total Continuers Exiters Entrants

On Average 

Employee

-0.20 -0.21 -0.23 -0.24

Controlling for 

other Factors *

-0.14 -0.16 -0.15 -0.18

* The factors are industry, branch activity, size, and years.

All differences are statistically significant.

4.2.2.2 Size of Entrants and Exiters in Producer Services Establishments

This section compares the size of producer services establishments, particularly entrants and exiters, in 

Appalachia to their rest of the U.S. counterparts over all sample years using the flows measure of size 

(see A2.6 for a discussion of the specification). The results presented in Table 7 show that producer 

services entrants in Appalachia are about 4 percent smaller and producer services exiters are about 7 

percent smaller than their rest of U.S. counterparts. Focusing on the all controls results, establishments 

are smaller in Appalachia than in the rest of the U.S. for continuing establishments (by 12 percent), 

entering establishments (by 7 percent), and dying establishments (by 8 percent). As compared to the 

size gap for the entire economy, the size differences here are larger especially for continuing 

establishments (compare to Table 3). 

Table 7: Size of Entrants and Exiters in Producer Services: the Differences Between 

Appalachia and Rest of U.S. 

Type of Establishment Type

Comparison

Total Continuers Exiters Entrants

Average 

Establishment

-0.01 -0.09 -0.07 -0.04

Controlling for 

other Factors *

-0.07 -0.12 -0.08 -0.07

* The factors are industry, branch activity, and years.

All differences are statistically significant.

4.3 Employment Creation and Destruction in Producer Services

The employment flows for producer services in the U.S. and Appalachia are shown in Figure 13. Figure 
39

13-A shows the net employment growth rates for the two areas. Relative to other sectors of the 

economy, producer services experience strong net employment growth in both Appalachia and the U.S. 

(compare to the upper panel in Figure 8). The net employment growth rates are very similar across the 

two areas except that the marked slowing in net employment growth in the 1987–1992 period in the 

U.S. is not as noticeable in Appalachia. Figure 13-B shows the underlying job creation and destruction 

rates for producer services for the U.S. and Appalachia. The job creation and destruction rates for 

Appalachia are lower than those for the U.S. The U.S. shows a sharp increase in job destruction and a 

decrease in job creation in 1987-92, but Appalachia does not show this. 

It is possible to summarize these differences over all of the years in the study. The results of this 

comparison are presented in Table 8 (see A2.8 for a description of the specification). In contrast to the 

results for the total economy, the net employment growth rates for producer services in Appalachia are 

actually higher than those for the rest of the U.S. However, recall that the net employment growth rates 

for Appalachia are also higher than those of the rest of the U.S. once industry (and other characteristics) 

had been controlled for, and so this result is not surprising. The net employment rate is 3.7 percentage 

points higher in Appalachia than in the U.S. when controlling for differences in characteristics. 

Underlying this higher net employment rate are lower job creation and destruction rates. The job 

destruction rates are strikingly lower in Appalachia. The difference in the job creation rates between 

Appalachia and the rest of the U.S. narrows from 2.6 percentage points to 1.6 percentage points when 

controlling for differences in characteristics. By contrast, the difference in the job destruction rates 

widens from 4.1 percentage points to 5.3 percentage points when controlling for differences in 

characteristics. Combining the lower job creation and destruction rates, reveals that the employment 

reallocation rate for producer services in Appalachia is 6.9 percentage points lower than for the rest of 

the U.S.

Table 8: Job Flows of Producer Services: the Differences Between Appalachia and Rest of U.S.

Type of 

Comparison

Net 

Employment

Job Creation Job 

Destruction

Reallocation

Aggregate 1.50 -2.59 -4.09 -6.68

Controlling for 

other Factors *

3.66 -1.62 -5.28 -6.91

* The factors are industry, branch activity, size, and years.

All differences are statistically significant.

4.3.1. Employment Rates for Metropolitan and Non-Metropolitan Areas of Appalachia

The net employment growth rate for producer services, as for the economy as a whole, is higher for 

establishments in metropolitan areas in Appalachia than for non-metropolitan areas in Appalachia. As in 

general, the job creation rates are higher in the metropolitan area but these differences are more 

pronounced for producer services. The job destruction rates are relatively similar across metropolitan 

designation. 
40

Figure 13-A. Net Employment Growth in Producer Services for the U.S. and Appalachia 

Net Employment Growth

0

10

20

30

40

50

1982-87 1987-92 1992-97

US NET

AR NET

Figure 13-B. Job Creation and Destruction Rates in Producer Services for the U.S. and 

Appalachia

Job Creation and Destruction

20

40

60

80

1982-87 1987-92 1992-97

US POS

US NEG

AR POS

AR NEG
41

5. Comparison of Appalachian Subregions to the United States

The Appalachian Regional Commission divides the Appalachian Region into three subregions based on 

geographic location: Northern, Central, and Southern. The first part of this section describes these 

subregions in detail using data from the LBD concerning geography, industry, branch activity, 

establishment size, and wages. The second part of this section examines the establishment formation and 

attrition dynamics of these subregions. The third part of this section, analyzes the employment dynamics 

in these subregions. The base of comparison for all of these analyses is the U.S.

5.1 Characteristics of the Subregions

To place the subregions in context, the Northern and Southern subregions’ economies are of roughly the 

same size (as measured by the number of establishments and employment) but the Central subregion’s 

economy is much smaller. The Central subregion accounts for 22 percent of the counties in Appalachia 

but only 9 percent of the establishments, and slightly less of the employment. The Northern subregion 

accounts for 35 percent of the counties and 50 percent of establishments in 1982 and 45 percent of the 

establishments in 1997 (employment has about the same shares). The Southern subregion accounts for 

43 percent of the counties and 41 percent of the establishments in 1982 and 46 percent in 1997 

(employment has about the same shares). 

5.1.1. Economic Activity Varies in Metropolitan and Non-metropolitan Areas Within Each 

Subregion 

One of the most striking differences in the subregions is the variation in distributions of economic activity 

over metropolitan and non-metropolitan areas. The share of establishments in metropolitan areas for the 

Central subregion is a little less than 20 percent and the share of employment in metropolitan areas is 

slightly more than 20 percent. In contrast, the share of establishments in metro areas for the Northern 

and Southern subregions is about 65 percent; for employment, about 70 percent. These shares are 

roughly constant over the sample period. These differences in metropolitan-rural distributions among 

subregions are one of the reasons why the Central subregion is most similar to the general perception of 

Appalachia. The other reason is the differences in industry distribution.

5.1.2. Industry Varies Within Each Subregion, but There are Some Similarities 

The three subregions have some similarities and differences in their sectoral composition. All three 

subregions in 1982 are dominated by Manufacturing, but by 1997 the Central and Northern subregions 

are dominated by Services. In all three subregions in 1982 and 1997, Retail Trade is the second most 

dominant sector, except for the Southern subregion in 1997, in which Retail Trade is the third most 

important sector behind Manufacturing and Services. Figure 14 shows the location quotients for each of 

the subregions relative to the U.S. 
42

Figure 14 A. Central Appalachia’s Relative Employment Shares by Sector

Central Sub-Region

0

0.5

1

1.5

2

2.5

3

Mining

Constr.

Manuf.

Trans.Whole

Retail

FIRE

Services

1982

1987

1992

1997

Figure 14-B. Northern Appalachia’s Relative Employment Shares by Sector

Northern Sub-Region

0

0.5

1

1.5

2

2.5

3

Mining

Constr.

Manuf.

Trans.

Whole

Retail

FIRE

Services

1982

1987

1992

1997
43

Figure 14-C. Southern Appalachia’s Relative Employment Shares by Sector

Southern Sub-Region

0

0.5

1

1.5

2

2.5

3

Mining

Constr.

Manuf.

Trans.Whole

Retail

FIRE

Services

1982

1987

1992

1997

While mining is vastly over-represented in the Central subregion in all years, the Central subregion has 

seen increases in its share of Manufacturing and Retail Trade employment. 13 The Northern subregion 

has a location quotient exceeding one in mining and manufacturing. The Southern subregion has 

especially high employment shares in Construction and Manufacturing relative to the U.S. Comparing 

the subregions to each other, the Central is over-represented in Mining and Retail Trade, the Northern 

is over-represented in FIRE and Services, and the Southern is over-represented in Construction and 

Manufacturing.

5.1.3. Establishment and Employment Shares at Branch Establishments

Establishment and employment shares at branch establishments are slightly lower in the Central 

subregion than in the Northern and Southern subregions. There has been a slight tendency for the share 

of economic activity (establishments and employment) to increasingly be at multi-unit firms over the time 

period. This increase is most noticeable in the Central subregion at about the middle of the sample 

period.

5.1.4. Establishment Size in the Subregions

The average establishment sizes for the subregions are relatively similar, but their differences are 

consistent over time. Over the four census years, the Central subregion has the smallest average 

establishment size (about 13 employees), the Northern has the middle (about 15 employees), and the 

Southern has the largest (about 16 employees). Using the flows measure of size over all of the years in 

the sample period, and comparing the subregions of Appalachia to the rest of the U.S. reveals that the 

 

13 The scale has been truncated at three in order to show more detail, but would extend past ten in order to 

accommodate the location quotient for the Central Region in Mining.
44

Central establishments are 4 percent smaller and the Northern and Southern establishments are about 2 

percent larger than establishments in the rest of the U.S. However, when controlling for other 

characteristics, the Central establishments are 12 percent smaller, the Northern establishments are 3 

percent smaller, and the Southern establishments are about 4 percent smaller than establishments in the 

rest of the U.S.

5.1.5. Wages in the Subregions Compared with Wages in the United States

Recall that wages for the average employee are about 10 percent lower in Appalachia than in the rest of 

the U.S. In this section, the wages in the subregions are compared to the rest of the U.S. by year (see 

A2.2 for the estimation specification). 

As shown in Table 9, wages for the Central subregion are about 20 percent below the rest of the U.S. 

and the Southern and Northern are about 10 percent below the rest of the U.S. Notice that the wage 

gap shrinks, then rises over time for the Central subregion, but actually increases slightly for the 

Northern and Southern subregions. With controls, the wage gap between the Central subregion and the 

rest of the U.S. declines over time, while the gap is essentially unchanged for the Northern and Southern 

subregions. (Although the wage gap for the subregions increases in the early years of the sample, this 

may reflect Appalachia’s heavy reliance on manufacturing).

Table 9: Difference in Wages Between Appalachian Subregions and the Rest of U.S.

Subregions 1982 1987 1992 1997

Average Employment

Central -0.23 -0.15 -0.19 -0.21

North -0.08 -0.08 -0.12 -0.13

South -0.09 -0.09 -0.10 -0.12

Controlling for other Factors*

Central -0.30 -0.20 -0.19 -0.18

North -0.11 -0.08 -0.10 -0.11

South -0.11 -0.11 -0.11 -0.10

* The factors are industry, branch activity, and establishments size.

All differences are statistically significant.

5.2 Establishment Births and Deaths in the Subregions

Establishment birth and death rates by subregions are shown in Figures 15-A and 15-B. The Southern 

subregion has the highest birth rate followed by the Central and Northern subregions. Ignoring the 

decline in the Southern subregion’s birth rate from 1987 to 1992 (which mirrors that of the U.S. 
45

economy), the difference in the birth rates is relatively stable over the three periods, even as all three 

subregions experience a decline in the rates. Ignoring the up tick in the Southern subregion’s death rates 

from 1982 to 1992 (which mirrors that of the U.S. as a whole), the death rates for the Northern and 

Southern subregions are relatively similar and are lower than those for the Central subregion. The death 

rates for the three subregions converge over time. To differing degrees, the birth and death rates fall 

over the three time periods.

The prevalence of establishment entry and exit is measured by examining the probability that an 

establishment is an entrant or exiter (see A2.4 for how these probabilities are calculated). The 

probability that an establishment is an entrant is highest for the Southern subregion (33 percent) and the 

Northern subregion (31 percent), and lowest for the Central subregion (28 percent). The probability 

that an establishment is a death is highest for the Central subregion (26 percent), the Southern subregion 

(24 percent), and lowest for the Northern subregion (24 percent). When controlling for differences in 

characteristics across the areas, the difference between the probability of entry for the Central subregion 

is no longer significantly different than for the rest of the U.S.

Figure 15-A. Appalachian Subregion’s Establishment Birth Rates

Establishment Birth Rates

25

35

45

55

1982-87 1987-92 1992-97

Central

North

South
46

Figure 15-B. Appalachian Subregion’s Establishment Death Rates

Establishment Death Rates

25

35

45

1982-87 1987-92 1992-97

Central

North

South

5.2.1 Characteristics of Births and Deaths in Appalachian Subregions

The differences in the establishment birth and death rates for the subregions highlight the heterogeneity of 

the Appalachian Region. The next subsection examines whether the births and deaths in these 

subregions are qualitatively different from their U.S. counterparts. 

5.2.1.1 Wages of Entrants and Exiters in Appalachia Compared with the Rest of the U.S. 

In this section, the wages of entrants (or exiters) in Appalachian subregions are compared to entrants 

(or exiters) in the rest of the U.S. for all years in the sample (see A2.5 for a description of the estimation 

specification). In addition, wages by subregion are compared to continuer establishments in the rest of 

the U.S. The results are shown in Table 10. 

Focusing on the results that control for other characteristics, wages for the Central subregion’s 

employees are 16 percent lower than the rest of the U.S. Wages for the Northern and Southern 

subregions’ employees are 7 percent lower than the rest of the U.S. 

The wages for employees in the Central subregion are 20 percent lower for establishment entrants, and 

19 percent lower for establishment exiters than the rest of the U.S. counterparts. 
47

The wages for employees in the Northern subregion are 10 percent lower for establishment entrants and 

13 percent lower for establishment exiters, compared to their U.S. counterparts. The decomposed 

wage gaps are much larger than the total wage gap for the Northern subregion because the Northern 

subregion has very low birth and relatively more continuers than the rest of the U.S. 

The wages for employees in the Southern subregion are 9 percent lower for establishment entrants and 

10 percent lower for establishment exiters, compared to their U.S. counterparts. In all three subregions, 

the wage gaps are similar in size for employees at entrants and exiters. The wage gaps are smaller for 

Northern and Southern subregions when controlling for differences in other characteristics, but this is not 

the case for the Central subregion. 

Table 10: Wages of Births and Deaths Comparison: Differences Between Appalachia 

and the Rest of the U.S.

Establishment Type

Subregions

Total Continuers Exiters Entrants

Average Employment

Central -0.18 -0.20 -0.08 -0.16

North -0.09 -0.13 -0.16 -0.14

South -0.09 -0.12 -0.08 -0.08

Controlling for other Factors*

Central -0.16 -0.18 -0.19 -0.20

North -0.07 -0.10 -0.13 -0.10

South -0.07 -0.11 -0.10 -0.09

* Factors include industry, branch activity, year, and size.

All differences are statistically significant.

5.2.1.2 Size of Entrants and Exiters in Appalachian Subregions and in the U.S. 

In this section the sizes of entrants (exiters) in the subregions of Appalachia are compared to the size of 

entrants (exiters) in the rest of the U.S. (see A2.6 for the estimation specification). Table 11 shows the 

results of this comparison. The average entering establishment in the Southern subregion is actually 

larger than its counterpart in the rest of the U.S. However, controlling for other differences, entrants in 

the Southern subregion are 2 percent smaller than entrants in the rest of the U.S. Southern subregion 

entrants, and Southern subregion exiters are 5 percent smaller than their U.S. counterparts. Focusing 

solely on the results that control for other factors, Northern subregion entrants are 7 percent smaller and 

Northern exiters are 8 percent smaller than their U.S. counterparts. Central subregion exiters are more 

than 10 percent smaller than their counterparts in the rest of the U.S., while Central subregion entrants 
48

are only 7 percent smaller than their counterparts. 

Table 11: Size of Births and Deaths Comparison by Appalachian Subregions: Differences 

Between Appalachia and the Rest of the U.S.

Appalachian Establishment Type

Sub Regions

Total Continuers Exiters Entrants

Average Establishment

Central -0.04 -0.08 -0.04 ** -0.00

Northern 0.02 -0.05 -0.04 -0.03

Southern 0.02 0.03 -0.02 0.02

Controlling for other Factors*

Central -0.12 -0.14 -0.13 -0.07

Northern -0.03 -0.09 -0.08 -0.07

Southern -0.04 -0.04 -0.05 -0.02

Factors include industry, branch activity, and years.

All differences are statistically significant except when denoted by **.

5.3 Employment Creation and Destruction

The employment growth rates by subregions are shown in Figure 16A and B. The net employment 

growth rates are shown in Figure 16-A. The net employment growth rates for Northern and Central 

subregions are very similar—almost zero net employment growth in the first period and weak 

employment growth in subsequent periods. In contrast, the Southern subregion has strong net 

employment growth in the first and third periods, with a slowdown in growth in the second period, 

which mirrors that for the U.S. as a whole. 

Figure 16-B shows the job creation and destruction rates for the three subregions. With the exception 

of the increase in job destruction and decrease in job creation from 1987 to 1992, which is evident only 

in the Southern subregion, the Southern subregion has both higher job creation rates and lower job 

destruction rates than the other two subregions. The job destruction rates appear to converge over time 

for the three subregions. 
49

Figure 16-A. Net Employment Growth by Appalachian Subregion

Net Employment Growth By Region

0

10

20

1982-87 1987-92 1992-97

Percent Change

Central 

North

South

Figure 16-B. Job Creation and Destruction by Appalachian Subregion

Job Creation and Destruction

20

40

60

1982-87 1987-92 1992-97

Percent Change

Central POS

North POS

South POS

Central NEG

North NEG

South NEG
50

Table 12 summarizes the differences among subregions. The Central and Northern subregions have 

lower net employment growth rates than the rest of the U.S. However, when controlling for differences 

in industry, size, branch activity, and years, the net employment growth rate is higher in the Central 

subregion than it is for the U.S. Industry controls are responsible for this shift. This shift is not surprising 

when one recalls that the Central subregion is heavily dependent on the mining and manufacturing 

sectors. On the other hand, even with the controls, the Northern subregion still has net employment 

growth rates lower than the rest of the U.S., which suggests that the Northern subregion’s problems are 

more diverse than the Central subregion’s problems.

Table 12: Job Flows Comparison by Appalachian Subregion

Subregions Net 

Employment

Job Creation Job 

Destruction

Reallocation

Difference in Aggregate Rates

Central -4.79 -3.85 0.94 -2.91

Northern -6.49 -8.35 -1.86 -10.21

Southern 3.85 -0.88 -4.73 -5.61

Controlling for other Factors*

Central 3.55 -0.84 -4.39 -5.23

Northern -3.42 -5.55 -2.12 -7.67

Southern 7.76 3.16 -4.59 -1.43

* Factors include industry, branch activity, size, and years.

All differences are statistically significant.

The job creation rates in all three subregions are below that of the rest of the U.S. With the controls, the 

Southern subregion’s job creation rates exceed those of the rest of the U.S. The job destruction rates 

for the Central subregion are higher than those for the U.S., but the job destruction rates are lower for 

the Northern and Southern subregions than the rest of the U.S. When controls are applied the job 

destruction rates for all three subregions are all lower than those for the rest of the U.S.

The Northern subregion’s low net employment growth reflects too little job creation rather than too 

much job destruction (whether controlling for other factors or not). The Central subregion’s low net 

employment growth rates appear to be related to industry composition. If one controls for this (as well 

as other characteristics), then the Central subregion actually has higher net employment growth rates, 

reflecting less job destruction (rather than more job creation). Finally, the Southern subregion has higher 

net employment growth rates than does the rest of the U.S. Without controlling for other factors, this 

reflects lower job destruction rates than for the U.S. However, controlling for other factors, this reflects 

both higher job creation rates and lower job destruction rates relative to the rest of the U.S. 
51

6. Producer Services in Appalachian Subregions Compared to the U.S.

First we will present an overall comparison of the sector using data from the LBD. Next, establishment 

birth and death dynamics across the subregions are compared to the U.S. Finally, the analysis is 

extended to the employment flows for establishments that are classified in producer services.

6.1 Characteristics of Producer Services in the Appalachian Subregions

All three subregions of Appalachia experienced substantial growth in producer services sectors over the 

time period of this study. The number of establishments in the producer services sector grew from 1982 

to 1997 as follows: 3,000 to 7,000 in the Central subregion; 24,000 to 38,000 in the Northern 

subregion; and 19,000 to 43,000 in the Southern subregion. The share of employment in producer 

services also grew in each region from 1982 to 1997: from 7 to 11 percent in the Central subregion; 

from 9 to 13 percent in the North subregion; and from 8 to 14 percent in the Southern subregion.

6.1.1. Economic Activity in Metropolitan and Non-metropolitan Areas of Appalachian 

Subregions

Economic activity in the producer sector is more concentrated in metro areas, compared with each 

subregion’s overall economy. About 30 percent of employment in producer services in the Central 

subregion is in metro areas, compared to 20 percent for the Central subregion’s economy as a whole. 

Likewise, about 80 percent of employment in producer services in the Northern and Southern 

subregions is in metro areas, compared to 70 percent for the Northern and Southern subregional 

economies as a whole. These shares are roughly constant over all of the years in the sample. 

6.1.2. Shares of Multi-Unit Establishments for Producer Services in the Subregions

The shares of multi-unit establishments are about the same for the producer services sectors in each of 

the subregions as for their respective economies as a whole. However, employment in producer 

services sectors for each of the subregions is less concentrated in multi-unit firms than in their economies 

as a whole. The shares have shown an increase over time in economic activity occurring at multi-unit 

establishments. The increase is especially noticeable for the Central subregion at about the middle 

period of the sample. 

6.1.3. Size of Producer Services Establishments in the Subregions

The average sizes for establishments in the producer services sector are relatively constant across the 

subregions. Again, the Central subregion tends to have smallest average establishment sizes, but the 

ranking of average establishment sizes for the Northern and Southern subregions varies over the years. 

Using the preferred flows measure of size, the average establishment in the Central subregion is 9 

percent smaller, the Northern subregion is about 5 percent larger, and the Southern subregion is about 5 

percent smaller than the average establishment in the rest of the U.S. However, when controlling for 

other characteristics, the average establishment in the Central subregion is 12 percent smaller, the 

Northern subregion is 3 percent smaller, and the South subregion is about 9 percent smaller than 

establishments in the rest of the U.S. In contrast to the rest of the economy, the size difference between 

the Northern and Southern subregion is strikingly larger in producer services. 
52

6.1.4. Wages for Producer Services in the Subregions

Wages for employees at producer services establishments in the subregions of Appalachia are 

compared to their U.S. counterparts in Table 13 (see A2.2 for a description of the specification). The 

gap between the wages for the U.S. and the Appalachian Region in producer services was unusually 

low in 1982 (on a weighted-basis only). This anomaly appears in the subregions of Appalachia as well. 

Leaving aside 1982, the wage gap between the rest of the U.S. and the Central and Southern 

subregions narrows over the time period of the study. In contrast, the wage gap for the Northern 

subregion widens slightly over the time period. Nevertheless, by the end of the time period the gap for 

the Central subregion (24 percent) is still far larger than it is for the Southern (12 percent) and Northern 

(16 percent) subregions.

Table 13: Producer Services Wages Comparison by Subregions

Subregions 1982 1987 1992 1997

Average Employment

Central ** 0.02 -0.23 -0.23 -0.19

North -0.09 -0.14 -0.16 -0.14

South -0.09 -0.29 -0.25 -0.24

Controlling for other Factors*

Central -0.12 -0.31 -0.29 -0.24

North -0.05 -0.13 -0.15 -0.16

South -0.12 -0.21 -0.16 -0.12

* Factors include industry, branch activity, and size.

All differences are statistically significant except when denoted by **. 

6.2 Establishment Births and Deaths for Producer Services in the Subregions

The establishment birth and death rates for producer services establishments by region are shown in 

Figure 17. The establishment birth rates are especially high for the Southern subregion as compared to 

other subregions and as compared to the producer services sector for the U.S. The establishment death 

rates for producer services are more similar across the three subregions. 

The relative importance of establishment entry and exit in the producer services industries in the 

subregions of Appalachia compared to the U.S. is analyzed by calculating the probabilities that an 

establishment is an entrant or exiter (see A2.4 for a description of the methodology). A Northern 

establishment has a lower probability of being an entrant or an exiter than does an establishment in the 

rest of the U.S. A Southern establishment has a lower probability of being an exiter but higher 

probability of being an entrant than does an establishment in the rest of the U.S. A Central establishment 

has lower probability of being an entrant than does an establishment in the rest of the U.S. These results 
53

are similar to the results for the entire economy. The only difference is that in the most recent period, a 

Central establishment has a lower probability of being an exiter than does an establishment in the rest of 

the U.S. For the Central and Northern subregion, there is relatively less establishment dynamics in 

producer services than for the rest of the U.S. As has been seen in other comparisons to the rest of the 

U.S., the Southern subregion has strong entry dynamics and less exit dynamics.

Figure 17A. Establishment Birth Rates for Producer Services by Subregion

Establishment Birth Rates

25

35

45

55

65

1982-87 1987-92 1992-97

Central

North

South

Figure 17B. Establishment Death Rates for Producer Services by Subregion

Establishment Death Rates

25

35

1982-87 1987-92 1992-97

Central

North

South
54

6.2.1 Characteristics of Births and Deaths in Appalachia

This section examines whether the births and deaths in the producer services sector of the three 

subregions of Appalachia are qualitatively different from their U.S. counterparts. 

6.2.1.1 Wages of Entrants and Exiters in the Three Subregions Compared to Wages in the U.S. 

In this section the wages of entrants (exiters) in the three subregions are compared to entrants (exiters) 

in the rest of the U.S. (see A2.5 for a description of the estimation specification). The results are shown 

in Table 14. 

Focusing on the results controlling for other characteristics, the wage gaps for the average employee, 

relative to the rest of the U.S. are as follows: for the Central subregion, 23 percent difference from the 

rest of the U.S.; for the Northern subregion, 11 percent; and for the Southern subregion, 16 percent. 

These gaps are larger than for the economy as a whole (but especially for the Central and Southern 

subregions when compared to the results in Table 10). 

In each subregion, the difference between the subregion and the U.S. in wages at exiting establishments 

is roughly of the same magnitude as the difference between the subregion and the U.S. in wages at 

entering establishments. In particular, the average employees at exiting and entering establishments in 

Central subregion have wages that are 30 percent smaller than their U.S. counterparts; in the Southern 

subregion the wage gaps are about 20 percent; and in the Northern subregion the wage gaps are about 

10 percent. This is one of the few areas in which Northern subregion seems to be faring better than the 

Southern. However, when comparing the wage gaps for continuers, the Northern and Southern 

subregions have the same wage gap (15 percent). 

Table 14: Wages of Births and Deaths in Producer Services by Subregions

Establishment Type

Subregions

Total Continuers Exiters Entrants

Average Employment

Central -0.19 -0.20 -0.38 -0.33

North -0.15 -0.21 -0.16 -0.13

South -0.25 -0.22 -0.27 -0.31

Controlling for other Factors*

Central -0.23 -0.24 -0.33 -0.32

North -0.11 -0.15 -0.07 -0.14

South -0.16 -0.15 -0.21 -0.19
55

* Factors include industry, branch activity, year, and size.

All differences are statistically significant.

6.2.1.2 Size of Entering and Exiting Establishments in Producer Services in the Subregions of 

Appalachia Compared to their U.S. Counterparts

(See A2.6 for a description of the estimation specification.) Table 15 shows the relevant results. 

Focusing on the results controlling for differences in characteristics, the size gaps for entering and exiting 

establishments within a subregion are of the same magnitude. For example, the average exiting 

establishment in the Northern subregion is 6 percent smaller than its U.S. counterpart, and the average 

entering establishment in the Northern subregion is also 6 percent smaller than its U.S. counterpart. 

Moreover, the size gaps for entering establishments are about the same size for the Northern and 

Southern subregions. The Central subregion has slightly bigger size gaps than the other subregions. Note 

that the small size gap for all establishments in the Northern subregion (3 percent) masks larger size gaps 

once controlling for entering and exiting establishments. The size gaps are roughly the same as they were 

for the economy as a whole, except for the Southern subregion, where the size gaps in producer 

services are larger in all categories, and for the Central subregion, where the size gaps are larger for 

entrants (compare to Table 11).

Table 15: Size of Births and Deaths in Producer Services by Subregion

Establishment Type

Region

Total Continuers Exiters Entrants

Average Establishment

Central -0.09 -0.18 -0.16 -0.09

North 0.03 -0.09 -0.05 -0.02

South -0.05 -0.06 -0.08 -0.05

Controlling for other Factors*

Central -0.12 -0.15 -0.12 -0.11

North -0.03 -0.12 -0.06 -0.06

South -0.09 -0.11 -0.09 -0.07

* Factors include industry, branch activity, and year.

All differences are statistically significant.

6.3 Employment Creation and Destruction Rates for Producer Services

The net employment growth rates for producer services by subregion in Appalachia are shown in Figure 

18-A. Figure 18-B shows the job creation and destruction rates are shown in the lower panel. The net 

employment growth rates for producer services establishments are noticeably higher for all three 

subregions as compared to establishments in the entire economy (compare to Figure 16). Comparing 
56

these across the subregions, the Southern subregion has the highest net employment growth rates over 

all three time periods. The drop in net employment growth for the Southern subregion for the second 

period parallels that for the rest of the nation. 

Underlying this strong net employment growth in the Southern subregion are very high job creation rates 

over all three periods. The Southern subregion’s job creation rate in producer services is above 60 

percent for all three time periods. Interestingly, the job destruction rates for producer services 

establishments in the Southern subregion are slightly higher than for establishments in general. The job 

creation rates for the Northern and Central subregions in producer services are also higher than the 

rates for establishments in general. In contrast to the pattern for the Southern subregion, the job 

destruction rates are much lower for the Central and Northern subregions in the earliest time period. 

It is possible to summarize the differences in the job flows rates by year, as shown in Figure 18 (see 

A2.8 for a description of the estimation specification). The differences between the job flows rates in 

producer services in the subregions of Appalachia compared to the rest of the U.S are shown in Table 

16. The upper panel shows the differences in these rates when aggregating the results up to the 

producer services industry over all of the years in the study.

Figure 18-A. Net Employment Growth in Producer Services by Subregion

Net Employment Growth

0

10

20

30

40

50

1982-87 1987-92 1992-97

Central

North

South
57

Figure 18-B. Job Creation & Destruction Rates for Producer Services by Subregion

Job Creation and Destruction

20

40

60

80

1982-87 1987-92 1992-97

Central POS

North POS

South POS

Central NEG

North NEG

South NEG

Confirming the results from Figure 18, the net employment rate for the Southern subregion is the highest 

relative to the other subregions: the rate is about 9 percentage points above the net employment growth 

rate for the rest of the U.S., whereas the other subregions have net employment growth rates below that 

for the rest of the U.S. The job creation rate for the Southern subregion is higher than the rates for the 

other subregions as well as the rest of the U.S. All three job destruction rates are below that for the rest 

of the U.S. The lowest job destruction rate is in the Northern subregion. Finally, the reallocation rates 

for the Central and Northern subregion are lower than for the rest of the U.S., but the Southern 

subregion’s reallocation rate is indistinguishable from that of the rest of the U.S.

The lower panel of Table 16 shows the differences in the job flows rates in producer services in the 

subregions of Appalachia, compared to the rest of the U.S., when controlling for differences in 

composition of these areas in terms of industry, branch activity, establishment size, and time series 

patterns. These controls greatly affect the net employment growth rate of the Central and Northern 

subregions (raising both by about four percentage points). With the controls, the net employment growth 

rate of the Central subregion now exceeds that of the rest of the U.S. by nearly two percentage points. 

This improvement has come about almost exclusively through higher job creation rates. The differences 

in death rates are not much affected by the controls (they remain much lower than those for the rest of 

the U.S). 
58

Table 16: Job Flows of Producer Services by Subregion

Subregions Net 

Employment

Job 

Creation

Job 

Destruction

Reallocation

Difference in Aggregate Rates

Central -2.11 -9.61 -7.50 -17.11

North -6.12 -9.16 -3.04 -12.20

South 9.35 4.68 -4.67 ** 0.00

Controlling for other Factors*

Central 1.66 -5.73 -7.39 -13.13

North -2.00 -6.29 -4.30 -10.59

South 9.39 3.42 -5.97 -2.55

 *Other factors include industry, branch activity, size, and years.

All differences are statistically significant except when denoted by **. 
59

7. Conclusions

One indicator of the general economic health of a region is the rate at which new jobs are created. The 

newly developed Longitudinal Business Database has been used in this report to develop a detailed 

portrait of establishment formation and attrition and job creation and destruction in the Appalachian 

Region. The foremost finding is that the pace of reallocation in Appalachia is lower than it is for the U.S. 

This is evident in Appalachia’s relatively lower establishment birth and death rates and job creation and 

destruction rates. For example, on average over the study time period, the U.S. job creation rate 

exceeds 45 percent, while the Appalachian job creation rate is 43 percent. Similarly, the U.S. job 

destruction rate is about 35 percent, while the Appalachian job destruction rate is about 33 percent. 

Even when controlling for other differences, job creation rates are 1.2 percentage points lower and job 

destruction rates are 3.4 percentage points lower in Appalachia relative to the rest of the U.S.

Another indicator of the general economic health of a region is the quality of its jobs. The quality of jobs 

is measured in this report by the average wage paid at the establishment. Here too there is cause for 

concern about the economic health of Appalachia. The analysis shows that wages are about 10 percent 

lower in Appalachia than in the U.S. even when controlling for differences in other characteristics across 

the two areas. This wage discrepancy has not narrowed over the time of the study. Moreover, new 

establishments have a similar wage gap. Employees at new establishments earn wages 10 percent less 

than at new establishments in the rest of the U.S.

The producer services sector of the Appalachian economy has higher birth rates and job creation rates 

than the rest of the Appalachian economy, but the discrepancy between Appalachia and the U.S. exists 

even in this sector. For example, the gap between job creation rates for Appalachia and the U.S. is 1.2 

percentage points for the total economy and 1.6 percentage points for producer services. More 

troubling is the fact that the gap between the wages for employees at establishments in Appalachia as 

compared to employees at establishments in the rest of the U.S is much larger in this sector than for the 

total economy. Finally, this wage gap is even higher still for new establishments in producer services than 

for new establishments in the rest of the U.S.

The heterogeneity of the Appalachian Region is evident throughout the analysis in this report. Basic 

summary statistics concerning the number of establishments and employment in the subregions as 

classified by location and industry show enormous differences in the subregions. In terms of the

indicators of economic health in the subregions, there are also large differences across the subregions. 

For example, even when controlling for other differences the Central subregions employees have wages 

about 20 percent below the rest of the U.S. but the Northern and Southern subregions’ employees face 

a smaller wage gap of about 10 percent. The Central subregion’s low job creation rates can partly be 

explained in terms of the industry composition of the region. This is less the case for the Northern 

subregion where the job creation rates are markedly low even when controlling for other characteristics 

(although controlling for these characteristics does raise the job creation rates a bit). On the other hand, 

the wage gap in the Northern subregion is not as severe as it is for the Central subregion. Finally, the 

Southern subregion appears to be faring the best of the three subregions in terms of the indicators of 

economic health analyzed. When controlling for other differences, it is apparent that this is in part due 
60

almost equally to high job creation rates and low job destruction rates. Nevertheless, the wage gap for 

the Southern subregion is about 10 percent even when controlling for other differences and this gap is 

relatively steady over the study period. In sum, the Appalachian Region has areas that are comparable 

to the U.S. (for example, job creation in South) but has many other areas where it still lags behind the 

rest of the U.S.
61

References

Beyers, William B. (1989) “The Producer Services an Economic Development in the United States: The 

Last Decade” report prepared for U.S. Department of Commerce, Economic Development 

Administration.

Beyers, William B. and David P. Lindah. (1996) “Explaining the Demand for Producer Services” Is 

Cost-Driven Externalization the Major Factor?” Papers in Regional Science, Vol. 73(3), 351-

374.

Brandow Company, Inc. (2001) “Analysis of Business Formation, Survival and Attrition Rates of New 

and Existing Firms and Related Job Flows in Appalachia.”

Davis, Steven and John Haltiwanger. (1999) “Gross Job Flows” in “Handbook of Labor 

Economics Volume 3B, Orley C. Ashenfelter and David Card (eds.) Amsterdam: Elsevier 

Science B.V.

Davis, Steven, John Haltiwanger, and Scott Schuh. (1996) Job Creation and Destruction. Cambridge 

MA: MIT Press.

Dunne, Timothy, Mark Roberts, and Larry Samuelson. (1988) “Patterns of Firm Entry and Exit U.S. 

Manufacturing Industries,” RAND Journal of Economics, Vol. 19 (4), Winter, 495-515. 

Foster, Lucia, John Haltiwanger, and C.J Krizan. (2002) “The Link Between Aggregate and Micro 

Productivity Growth: Evidence from Retail Trade,” NBER Working Papers, Number 9120, 

August.

Goe, W. Richard (1996). “An Examination of the Relationship Between Corporate Spatial 

Organization, Restructuring, and External Contracting of Producer Services Within a 

Metropolitan Region,” Urban Affair Review, Vol.32 (1), September, 23-44. 

Harrington, James W. Jr, and Jeffrey D. Garneau (1998). “Exploring Spatial Divisions of Labor in 

Producer Services,” mimeo.

Isserman, Andrew M. (1996) “Socioeconomic Review of Appalachia. Appalachia Then and Now: An 

Update of ‘The Realities of Deprivation’ Reported to the President in 1964.” mimeo.

Jarmin, Ron and Javier Miranda. (2002) “The Longitudinal Business Database.” mimeo.

Jensen, J. Bradford. (1998) “Birth and Death of Manufacturing Plants and Restructuring in Appalachia’s 

Industrial Economy, 1963–1992: Evidence from the Longitudinal Research Database.”
62

A1. Data Appendix

A1.1 Constraining Data to Inscope

Establishments in the following industries are excluded as out of scope to the Economic Census: 

Agricultural Production; Agricultural Services, Forestry, Fishing; Railroad Transportation; U.S. Postal 

Service; Elementary and Secondary Schools; Colleges, Universities, and Professional Schools; Labor 

Unions, Political Organizations, Religious Organizations; Private Households; Public Administration, 

Unclassified Establishments; and establishments with missing industry codes. (Although the SIC system 

changed over the sample period, the 2-digit and 3-digit industry codes that constitute the list of out of 

scope industries did not change.) The geography exclusions for the Economic Census are for 

establishments that are located in the following areas: foreign, Guam, Virgin Islands, Northern Marianas, 

and Puerto Rico. Finally, establishments that report 941 payroll taxes for benefit payments and various 

funds are excluded.

Out of scope establishments account for 100% of Agriculture and Public Administration establishments,

less than 0.5% of Transportation establishments and about 9% of Services establishments for the U.S. 

Similarly, they account for 100% of Agriculture and Public Administration establishments, less than 0.5 

% of Transportation establishments and about 14% of Services establishments in Appalachia. In order 

to maintain the links in the establishments over time, an establishment is deleted if it is ever out of scope. 

Thus some in-scope observations are deleted in every year (cases where the establishment is sometimes 

in-scope and out of scope). For the U.S., out of scope establishments account for about 7% of 

establishments in 1982-87 and about 11% in 1992–1997 (the increase is due to the agricultural sector) 

and about 18% of employment in each of the census years. For Appalachia, out of scope 

establishments account for about 8% of the establishments in 1982–1987 and about 11% in 1992–

1997 and about 18% of employment in each of the census years. Note that scope is determined only 

after filling in missing industry codes (see the section below).

A1.2 Filling in Missing Industry Codes

There are over 200,000 establishments in 1982, 1987, and 1992 and about 60,000 establishments in 

1997 that are missing their industry codes for the U.S. For Appalachia, there are about 20,000 

establishments in 1982, 1987, and 1992 and 7,000 establishments in 1997 that are missing their 

industry codes. The missing industry codes are filled using codes from other years. Since industry codes 

are most reliable in census years, the data editing algorithm first searches for an industry code in the next 

census year, then searches forward from t+1 to 1998, and then backwards from t-1 to 1977. A 

second edit to the data takes care of industry codes that do not appear in the official SIC system. Using 

data from other years fills in industry codes for over 100,000 establishments in each of the years 1982, 

1987, and 1992, and about 40,000 establishments in 1997. For Appalachia, using data from other 

years fills in industry codes for over 10,000 establishments in 1982, 1987, and 1992, and about 2,000 

establishments in 1997. The impact of editing the industry data did not materially change the industry 

distribution for the U.S. 
63

A1.3 Removing Outliers

During the analysis of the employment data, impossibly large births were discovered in the data 

(establishments with more than 5,000 employees). All of these cases of large births in the in-scope data 

were deleted. Similarly, the wage data were found to include some establishments with impossibly large 

wages. For each year, all wage data that exceeded ten million dollars were deleted. In addition, any 

wage data that exceeded one million dollars in a year were deleted unless the establishment had five or 

less employees and was in one of the following industries: security broker, motion pictures, theatrical 

productions, doctor’s offices, or legal services. 

A1.4 Differences in Designation Rules 

In order to consistently measure births and deaths at establishment and in terms of employment flows, 

births and deaths are designated based upon establishment employment rather than positive payroll 

(which is essentially the rule used by the LBD analysts). In addition, the constraint that an establishment 

is only kept if it has positive employment in at least one of the years in a year-pair is applied to the data 

in this paper. To the extent that entering and continuing establishments have zero or missing employment, 

this designation will produce birth/death designations that differ from those produced by Jarmin and 

Miranda. There are about 700,000 establishments that have zero or missing employment in the U.S. in 

any census year. Similarly, there are about 50,000 establishments that have zero or missing employment 

in Appalachia. The majority of these cases, for both the U.S. and AR, are births. The employment rule 

yields about the same number of births and deaths as the payroll rule but has significantly fewer 

continuers. 

A1.5 Size Class Dummies

Establishments are classified based on their employment averaged over the two years in each year pair. 

The size classes are:

Class 0 0-4 employees

Class 1 5-19 employees

Class 2 20-49 employees

Class 3 50-99 employees

Class 4 100-249 employees

Class 5 250-500 employees

Class 6 500-999 employees

Class 7 1000 or more employees

A1.6 Definition of Producer Services

The following four papers were used as guides in defining producer services (Goe 1996), Beyers and 

Lindahl (1996), Harrington and Garneau (1998), and Beyers (1989). Although the general concept of 

producer services is the same across these papers, services used by firms in their production processes; 

the actual definition varies in inclusiveness across the papers. The definition used in this paper is 

comprised of the most frequently cited two-digit industries. Thus the producer services group in this 

paper consists of the following industries: banking, nondepository institutions, security brokers, 

insurance carriers, insurance agents, real estate, business services, legal services, and engineering and 
64

management. Note that the industry definition for 1982 is not strictly comparable to those for 1987, 

1992, and 1997 since under SIC72 87 was part of 89, and SIC 89 is not included in the definition of 

producer services used in this paper. 
65

A2. Methodology Appendix

A2.1 Measuring Differences in Size of Establishments

The difference in size of establishments between Appalachia and the rest of the U.S. is measured via a 

regression on log of average size with a dummy for whether or not the establishment is in the 

Appalachian Region (ARC). The log of average size is used since this allows the coefficients to be 

interpreted as showing approximately the percent difference in size between Appalachia and the rest of 

the U.S.A version of the regression controls for the differences between the Appalachian Region and 

the rest of the U.S. in branch activity, industry composition, and years. Controlling for differences in 

industry and branch activity removes the effects of differences in industry and branch activity 

composition of the Appalachia and the rest of the U.S. Thus, the controls are industry dummies 

(Industry), year dummies, and branch activity dummy (MU). Letting Det refer to the log of average size 

for establishment e, the regression equation has the form:

(1) * * * *

1

1514

1

2

Det =a+b ARCet+g MUet+fj ∑Industryet+hk ∑ Year +eet

When the comparison group is the subregions of Appalachia, the regression format is the same as in 

Equation 1, except now the Appalachian Region dummy is replaced by three regional dummies.

A2.2 Measuring Differences in Wages at Establishments

The difference in the wages between Appalachia and the rest of the U.S. is measured using a regression 

on (log of) wages by year with a dummy for whether or not the establishment is in the Appalachian 

Region (ARC). The regressions are run by year to control for the fact that wages are in nominal dollars 

and are growing over time. The log of wages are used since this allows the coefficients to be interpreted 

as showing approximately the percent difference in wages between Appalachia and the rest of the U.S. 

A version of the regression includes controls for other differences in Appalachia and the rest of the U.S. 

The controls include industry dummies (Industry) , size class dummies (Size), and a branch activity 

dummy (MU). Letting Wet refer to the log of the wage for establishment e, the regression equations 

have the form:

(2 ) * * * *

1

7

1

1514

Wet =a+b ARCet+g MUet+di ∑Size +fj ∑Industryet+eet

These are run as employment-weighted establishment-level regressions and so the coefficient on the 

Appalachian dummy can be interpreted as the difference in wages for the average employee in 

Appalachia vis-à-vis the rest of the U.S. When the comparison group is the subregions of Appalachia, 

the regression format is the same as in Equation 2, except now the Appalachian Region dummy is 

replaced by three regional dummies.

A2.3 Calculating Establishment Birth and Death Rates

In measuring the birth and death rates, the first question is what is the correct choice of the base. There 

are three potential choices for denominators for t-1 to t birth and death rates: t, t-1, the average of t and 

t-1. The choice mainly concerns whether one uses t or t-1 as the denominator for births. Dunne, 

Roberts, and Samuelson (1988) use t-1 for births and deaths. They describe the motivation for their 

choices as follows “The denominator of the exit rate is all firms in operation at the beginning of the time 
66

period and thus represents the pool of potential exiting firms. In the case of entry the pool of potential 

entrants cannot be observed. The denominator of the entry rate is the number of firms... in the previous 

period.” Jensen (1998) decomposes a particular year into its birth and death components and hence his 

measures are timed in a different manner than in the current paper. If one were to apply the timing 

conventions of this paper to Jensen’s measures, his measures would use t for births and t-1 for deaths. 

Since the analysis in the current paper is in terms of pairs of years, it makes sense to use a measure that 

makes the birth and death rates for that pair of years comparable. Since gross flows concepts are also 

used in this paper, it makes sense to have the denominator used by both birth and death rates to be the 

average of the number of establishments in the two time periods. This yields a nice connection between 

the employment-weighted establishment birth and death rates and employment flow rates. Thus the 

measures are:

NE (t-1,t) = new entrants between t-1 and t (exist at time t)

NX (t-1,t) = exiters that departed between t-1 and t (exist at time t-1)

NT(t) = number of establishments in t

ANT(t-1,t) = average number of establishments in t-1 and t:

 [NT (t-1) +NT (T)] / 2

Entry Rate: ENT (t-1,t) = NE(t-1,t) / ANT (t-1,t) 

Exit Rate: EXT (t-1,t) = NX(t-1,t) /ANT (t-1,t))

When applied to the data, the highest birth rates are those that use t, the lowest are those that use t-1 

(and of course, the measure that uses the average of t and t-1 employment falls between these). The 

measure of the death rates that uses the average of t and t-1 employment is lower than the measure that 

uses t. 

Weighted Birth and Death Rates

The establishment birth and death rates weighted by employment are measured as:

EE (t,t-1) = employment associated with new entrants between t-1 and t 

EX (t,t-1) = employment associated with exiters that departed between t-1 and t 

ET(t) = employment at all establishments in t

DENOM(t-1,t) = average number of employment at establishments in t-1 and t: 

[NT (t-1) +NT (T)] / 2

Employment Formation Rate: EENT (t-1,t) = EE(t-1,t) /DENOM (t-1,t)

Employment Attrition Rate: EEXT (t-1,t) = EX(t-1,t) /DENOM (t-1,t)

A2.4 Measuring Probabilities that an Establishment is a Birth or Death

In order to test the significance of these differences, the establishment-level data are pooled and logistic 

regressions are used to examine differences in the probability that an establishment is a birth (death) in 

Appalachia and the rest of the U.S.A version of the regression includes controls for other differences in 

Appalachia and the rest of the U.S. The controls include industry dummies at the sectoral level 
67

(Industry), year dummies, size class dummies (Size), and a branch activity dummy (MU). Note that the 

regressions compare the Appalachian Region to the rest of the U.S. (whereas the plots show the 

Appalachian Region and the entire U.S.) Letting Eet refer to the event in question (for example when 

looking at births E is 1=birth, 0=otherwise), the regressions have the form:

(3) * * * * *

1

7

1

8

1

2

Eet=a+b ARCet+g MUet+di ∑Sizeet+fj ∑Industryet+hk ∑ Year+eet

The coefficients on the Appalachian dummy for this regression are presented in the tables below. Table 

A1 shows the results for the regressions comparing Appalachia to the rest of the U.S. The negative and 

significant coefficients on the Appalachian dummy mean that the probability that an establishment is a 

birth (death) is lower if the establishment is in Appalachia rather than in the rest of the U.S. Industry at 

the sectoral level continues to be a control for the producer services regression because the producer 

services industry includes establishments in two different sectors of the economy (FIRE and Services). 

When the comparison group is the subregions of Appalachia, the regression format is the same as in 

Equation 3, except now the Appalachian Region dummy is replaced by three regional dummies. Table 

A2 shows the results for the regressions comparing subregions of Appalachia to the rest of the U.S.

Table A1: Births and Deaths Comparison

Total Economy Producer Services

Type of 

Comparison Exit Entry Exit Entry

Average 

Establishment

-0.07 -0.06 -0.16 -0.08

Controlling for 

other Factors *

-0.10 -0.06 -0.18 -0.10

* The factors are industry, branch activity, size, and years.

All differences are statistically significant. 
68

Table A2: Probability of Births and Deaths Comparison

Total Economy Producer Services

Region

Exit Entry Exit Entry

Average Establishment

Central 0.05 -0.04 -0.19 -0.07

North -0.09 -0.18 -0.17 -0.23

South -0.09 0.06 -0.15 0.06

Controlling for other Factors*

Central **-0.02 -0.06 -0.23 -0.11

North -0.11 -0.19 -0.18 -0.24

South -0.11 0.06 -0.18 0.04

* The factors are industry, branch activity, size, and years.

All differences are significantly different except those denoted by **.

In order to quantify how much lower the probability is, the predicted probability that an establishment is 

a birth (death) for Appalachia and the rest of the U.S. is calculated. The probability is: Probability 

(Y=1) = e x’ß/(1+e x’ß). Where Y is birth (death). This is calculated for ARC=1 and ARC=0 for the 

simple regressions. Calculating the associated probabilities is more complicated when controlling for 

other characteristics since the calculation involves picking a value for each of the variables in the 

equation. Since all the variables are dummies, a simple rule such as using the mean value will not work. 

For the total economy case comparing Appalachia to the rest of the U.S., two combinations of 

characteristics are chosen to see how the probabilities of an establishment being a birth or death 

changes. For each of these choices, the time period is 1982-87 and the industry is Services (which has 

the most establishments). The first combination reflects the characteristics of the majority of 

establishments in the U.S., branch activity is set for single units and the establishments are in the smallest 

size class. The second choice is for a slightly larger size class (20–49 employees) and multi units. For 

the small single units, the difference between Appalachia and the U.S in the probability that an 

establishment is a birth is about 1.5 percentage points and for a death the difference is about 2 

percentage points (Appalachia is lower for both). For the medium multi units the percentage differences 

between Appalachia and the U.S. are less than 1 percentage point with the gap slightly larger for deaths 

(Appalachia is lower in all cases). 

A2.5 Measuring the Differences in Wages at Entrants (Exiters)

The wages of entrants (exiters) in Appalachia are compared to entrants (exiters) in the rest of the U.S. 

by pooling the establishment data and running a regression on the log of wages. The regression is 

employment-weighted so that the coefficients reflect differences in wages for the average employee 

(rather than the average establishment). A version of the regression includes controls for other 
69

differences in Appalachia and the rest of the U.S. The controls are industry, branch activity, size, and 

years. Letting Aet refer to the (log of the) average over the year-wage pairs wage for establishment e in 

one of the three groups (births, deaths, or continuers) the regression equation has the form:

(4 ) * * * *

1

7

1

1514

1

2

Aet=a+b ARCet+g MUet+di ∑Size+fj ∑Industryet+hk ∑Year+eet

Note that the regressions without controls do not control for differences in years and thus are not 

directly comparable to the regressions without controls by year. When the comparison group is the 

subregions of Appalachia, the regression format is the same as in Equation 4, except now the 

Appalachian Region dummy is replaced by three regional dummies.

A2.6 Measuring the Differences in Sizes at Entrants (Exiters)

To test the significance of these size differences, regressions are run for each of these three groups of 

establishments (births, deaths, continuers) with the sample pooled over time on the (log of the) average 

size variable with an Appalachian dummy. A version of the regression includes controls for other 

differences in Appalachia and the rest of the U.S. The controls are branch activity, industry, and years. 

Letting Det0G refer to the log of the average size of an establishment e that is in one of the three groups G

of establishments (births, deaths, or continuers), the regression format is:

(5) * * *

1

1514

1

2

Det∈G =a+b ARCet+g MUet+fj ∑Industryet+hk ∑Year+eet

Regression results reported are for unweighted regressions and so show the results for the average 

establishment. When the comparison group is the subregions of Appalachia, the regression format is the 

same as in Equation 5, except now the Appalachian Region dummy is replaced by three regional 

dummies.

A2.7 Calculating Job Creation and Destruction

Job creation and destruction rates are calculated using the methodology from Davis, Haltiwanger, and 

Schuh (1996). The job creation (destruction) rate is measured as the weighted average of the 

employment growth rates of expanding (contracting) plants including the contribution of entering (exiting) 

establishments. The employment growth rates are measured as the change in employment between t-1 

and t, divided by the average of employment in t-1 and t. This measure of growth rates is the preferred 

measure since it is symmetric about zero and can incorporate establishment births and deaths.

Relationship Between Establishment Birth and Death Rates and Job Creation and 

Destruction Rates

A nice feature of the establishment formation rates used in this paper is that these are the same 

rates as the job creation at births (POSB) and job destruction at deaths (NEGD) found in 

Davis, Haltiwanger, and Schuh (1996). That is,

EENT (t-1,t) = POSB (t-1,t)

EEXT (t-1,t) = NEGD (t-1,t)
70

A2.8 Measuring Differences in Job Creation and Destruction Rates

In order to check the significance of these differences in employment dynamics, the establishment-level 

data are pooled and employment share-weighted regressions are run of the growth rates on a dummy 

variable for the Appalachian Region and relevant establishment-level controls. The growth rates are net 

employment, job creation, job destruction, and total reallocation. A version of the regression includes 

controls for other differences in Appalachia and the rest of the U.S. The controls include year dummies, 

industry dummies, a branch activity dummy, and a series of size class dummies. The regressions 

compare the Appalachian Region to the rest of the United States (whereas the plots show the 

Appalachian Region and the entire United States). Letting Get refer to one of the four growth rates in 

question, the four regression equations have the form:

(6 ) * * * *

1

7

1

1514

1

2

Get=a+b ARCet+g MUet+di ∑Size+fj ∑Industryet+hk∑Year+eet

These are establishment-level regressions weighted by establishment-level (average) employment shares 

using pooled data. Since the regressions are weighted by the (average) employment share, the 

coefficients correspond to the aggregate measure of the growth rate concept being estimated.14 For 

example, the coefficient on ARC for the net employment regression shows the percentage point 

difference in the net employment growth rate for Appalachia as compared to the rest of the U.S. When 

the comparison group is the subregions of Appalachia, the regression format is the same as in Equation 

6, except now the Appalachian Region dummy is replaced by three regional dummies.

 

14 This form of regression is used by Davis and Haltiwanger (1999) for their plant-level regressions. An 

alternate form of the regressions that could have been used is weighted by employment and thus shows the 

difference between the growth rates for the average employee. The regressions weighted by employment look very 

similar to these regressions once we include the year dummies.