Monthly Labor Review • March 2007 39

Employment Dynamics

Jessica Helfand,

Akbar Sadeghi,

and

David Talan

Employment dynamics: small and large 

firms over the business cycle

The use of the dynamic-sizing approach to measuring

employment growth by size of firm provides information useful

in the debate on small firm versus large firm job creation

Jessica Helfand, Akbar 

Sadeghi, and David 

Talan are economists in 

the Office of Employment and Unemployment Statistics, Bureau 

of Labor Statistics.

E-mail: 

Helfand.Jessica@bls.gov

Sadeghi.Akbar@bls.gov

Talan.David@bls.gov 

W  ho creates the most jobs: small

businesses or large businesses?

This subject has been widely discussed among economists and researchers and

is often a topic of political debates citing the

important role of small businesses in creating

jobs. The small-firm versus large-firm iss

is twofold: do small firms create most of the

new jobs, or is the share of small firms’net job

gains greater than their base share of employment? Economists argue that the answer depends on which methodology is used.1 N

statistics from the Business Employment

Dynamics (BED) program of the U.S. Bureau

of Labor Statistics (BLS) provide data with

which to analyze many of the size class methodological issues, and are a valuable data resource with which to answer these questions.

In September 2003, the BLS began publishing the quarterly BED data series. Since

the initial release of the data, the BLS developed two additions: the BED statistics by industry (published in May 2004) and statistics by firm size class (published in December

2005). These new series provide much needed quarterly data with which to observe a

understand the dynamics of the job market.

When the quarterly net employment change

is decomposed into gross job gains and gross

job losses, and when gross job gains are further divided into business openings and expansions and gross job losses into business

closings and contractions, the resulting business employment statistics reveal the underlying dynamics of the job market.

The latest publication of BED data by firm

size was a challenge for the BLS. Initial research showed that the specific methodology used to measure employment changes by

size class from a longitudinal database is important because alternative methods generate sharply different results.2 The evaluation

of alternative methods led to the selection

of “dynamic sizing” as the Bureau’s employment sizing method. Dynamic or momentary sizing, as suggested by Per Davidsson,

is based on the allocation of a firm’s employment gain or loss during a quarter to each

respective size class in which the change occurred.3 The BLS is the first statistical agency

to use this approach in measuring employment growth by size of firm.

This article analyzes quarterly data on

gross job gains and gross job losses by

size class from the second quarter of 1990

through the third quarter of 2005.4 First,the

article briefly explains the concepts, definitions, and record linkage methodology used

by the BLS to generate estimates of these

data. Second, an overview is presented of

the methodological issues that the BLS faced

in selecting the final method for classification of firms by size class. Finally, the discussion focuses on an analysis of the BED

size class time series, with special attention

on the role and contribution of various size
Employment Dynamics

40 Monthly Labor Review • March 2007

classes to gross job gains, gross job losses, and net change

in employment over the course of business cycles in the

U.S. economy.

Concepts and methodology

The BED statistics are based on the idea of“gross job flows,”

a new approach in understanding changes in the job market.The concepts of gross job flows emerged through the

use of U.S. business establishments’microdata.5 Researchers used data sources such as the Census Bureau’s longitudinal database on manufacturing and State unemployment insurance files in creating a rich body of literature

on this subject.6

Data on gross job gains and gross job losses reflect adjustments made by businesses in reaction to changing

economic events and conditions. The quarterly statistics

on gross job gains and gross job losses are derived from

the BLS Quarterly Census of Employment and Wages (QCEW) program. The QCEW microrecords are link

across quarters to create a longitudinal history for each establishment, making up the Longitudinal Database. Records are matched by their unique identifiers, includi

State codes, unemployment insurance numbers, and reporting unit numbers. The objective is to link continuo

records and to avoid generating spurious business births

and deaths in the event of situations such as changes of

ownership, mergers, acquisitions, spin-offs, and other corporate restructuring.

Once the tabulation of these data is complete, establishments can then be aggregated by an employer’s Federal

tax identification number, known as the Employer Identification Number (EIN), to measure BED data elements by

firm.This article focuses on data elements tabulated at the

firm level.

BED data elements including employment levels and

counts of establishments at opening, expanding, closing

and contracting businesses are constructed from the Longitudinal Database. During the tabulation process, the

employment reported in the third month of each consecutive quarter is used to measure the over-the-quarter employment change. Gross job gains are equal to the sum of

employment at opening firms and the net change in employment at expanding firms. Similarly, gross job losses

are the sum of prior quarter employment at currently closing firms and the net change in employment at contracting firms.7 The net employment growth for all firms can

be measured in two ways: the difference between total employment in the current and previous quarters, or the difference between gross job gains and gross job losses in the

current quarter.8

Four size class methodologies under consideration. There

are many ways that firms can be classified into size classes for a longitudinal analysis of employment growth.The

BLS considered four specific classification methodologies: quarterly base-sizing, annual base-sizing, mean-sizing, and dynamic-sizing, and ultimately decided on dynamic-sizing as the preferred method.These methods and

the criteria for selection are discussed in a 2006 article by

Shail Butani and others.9

Employment growth is measured as the change in firm

size from quarter to quarter. The dynamic-sizing methodology allocates a firm’s quarterly employment gain or lo

to each respective size class in which the change occurred.

Firms are initially assigned to a size class based on their

employment in the previous quarter and over-the-quarter employment changes are distributed to the appropriate size category when that size class threshold has been

crossed. For example, if a firm grows from 3 employees 

13 employees, the growth of 10 would be allocated as follows: size class 1 to 4 employees would be credited with

the growth of 1 employee (the growth from 3 to 4), size

class 5 to 9 employees would be credited with the growth

of 5 employees (the growth from 4 to 9), and size class 10

to 19 employees would be credited with the growth of 4

employees (the growth from 9 to 13).The methodology of

dynamic-sizing was initially proposed by Per Davidsson

in two research papers in 1996 and 1998.10 

Dynamic-sizing is based on a measurement process

which assumes continuous linear employment growth or

loss from quarter to quarter, with the growth or loss allocated into the appropriate size class at the moment it occurred. In the example of a firm growing from 3 employees in June to 13 employees in September, this growth 

10 employees can be linearly modeled as the growth of 1

employee every 9 days (13 weeks from one quarter to the

next quarter, 7 days per week, and 10 employee growth

over these 91 days). If a firm’s employment change could

be measured on a daily basis, and if this employment

change occurred linearly within the quarter, then the statistics from this measurement process would be equivalent to the statistics from dynamic-sizing with quarterly

point-in-time employment data.

Firm as a unit of analysis. While the other BED data series use the establishment as the unit of analysis, the size

class data are based on the firm level. An establishment 

defined as an economic unit that produces goods or ser-
Monthly Labor Review • March 2007 41

vices, usually at a single physical location, and engages in

one or predominantly one activity. A firm is a busines

either corporate or otherwise, and may consist of one or

more establishments.

There are valid arguments for choosing either the firm

or the establishment as the unit of analysis for producing size class tabulations. If employment changes are the

result of decisions made at corporate headquarters, then

the firm is the appropriate unit for analyzing the expansion and contraction of businesses. Conversely, if employment changes are the result of individual establishment

decisions based upon local labor market conditions, then

the establishment is the appropriate unit to analyze business expansions and contractions. The truth obviously li

somewhere between these two extremes—employment

changes at individual establishments are affected by both

corporate decisions and by local factors.The BLS believes

that firm-level measurement of size classes is more consistent with the role of corporations as the economic decisionmakers than with each individual establishment.The

EIN is the firm-level identifier used to create the BED size

class statistics.

Small businesses and the number of size classes. What is

a small business? Economic literature is full of references to small businesses. However, there is not a consensus

among economists as to what constitutes a small business.

Depending on the scope of the research and the availability of data, various sizes for small businesses are defined,

analyses made, and policies recommended.The U.S. Small

Business Administration (SBA) defines a small business

for research purposes as an independent business having fewer than 500 employees; however, the SBA’s Office

of Size Standards also has industry specific definitions of

small businesses for government purposes.11 Additionally, there are other national and statewide advocacy groups

in the private sector whose functions are to support and

promote the concerns of very small firms, typically fewer

than five employees.12These “micro businesses” are less affected by economic downturns and act as “shock absorbers”in the economy.13

The BED data are based on the nine size classes designated by the Office of Management and Budget as official

size class standards for use by Federal agencies in industrial and occupational classifications. However, the BLS

also has created two additional size categories to make

analysis more compatible with existing size class conventions: a category of 100 or more employees, and a category of 500 or more employees. Data on size classes may 

combined to create broader categories; in the absence of

a single definition for small or large firms, data users are

able to create categories of interest for study.

BED data series: June 1990–September 2005 

Frm size class. From June 1990 to September 2005, the

private sector has experienced gross job gains averaging

6.6 million jobs each quarter. Which size class is responsible for the most gain

Firms with fewer than 100 employees contributed an

average of 61.4 percent of gross job gains,while firms with

fewer than 500 employees contributed 77.2 percent of total gross job gains. Over this same period, private sector

average quarterly gross job losses totaled 6.3 million, of

which firms with fewer than 100 employees had a 62.3-

percent share and firms with fewer than 500 employees

had a 77.8-percent share.14 (See table 1.)

Gross job gains and gross job losses combined yield

an average quarterly net gain of 324,000 jobs. Firms with

fewer than 100 employees contributed 45.0 percent of the

average quarterly net growth, while firms with fewer than

500 employees contributed 63.7 percent.These data show

that within this time series, firms with fewer than 500

employees have, on average, contributed the most to net

job gains. The share of these firms in total job creation 

greater than their share of total employment: on average

over this time series, firms with fewer than 500 employees

have contained 56.7 percent of economywide employment

but have contributed 63.7 percent of net employment

gains. (See tables 1 and 2). These numbers are consis

with the conclusions of many studies.15 The larger contribution of small firms to job growth is evident in both net

and gross job gains. This fact coupled with the absence 

the regression-to-the-mean fallacy in the dynamic-sizing

methodology may settle many controversies surrounding

the role of small size businesses in job creation.16

Expansions, openings, contractions, and closings. The da

have shown that, on average, expanding firms have created

about 83 percent of total gross job gains per quarter while

opening firms accounted for the remaining 17 percent.

The very large firms, those with 1,000 or more employees,

accounted for 21.3 percent of gross job gains from expansions, the highest share among the nine size classes. The

next largest share belonged to size class 20 to 49 employees, with 15.2 percent of the gross job gains from expansions. These two size groups also had the largest average

quarterly shares of gross job losses from contractions, 20.6
Employment Dynamics

42 Monthly Labor Review • March 2007

percent and 15.3 percent respectively. (See table 1

Firm openings and closings occurred mostly in smaller size classes. In size class 1 to 4 employees, the average quarterly share of gross job gains from openings w

51.2 percent, and of gross job losses from closings was

48.6 percent.This share, unlike expansions and contractions, diminishes as firm size increases.

Size class dynamics. The distribution of firms among the

nine size classes is a compelling topic. As one would expect over this time series, the number of firms in each 

the size classes has increased across the board. (See table 3.) However, the percent share of firms in each class

has increased for two dissimilar classes: firms with 1 

4 employees and firms with 250 to 499 employees. Firms

with 1 to 4 employees have represented more than half

of total firms in the private sector. From first quart

1990 to first quarter 2005, the share of firms in this size

class has grown from 52.6 percent to 54.4 percent. T

share of size class 5 to 9 employees fell the most, from

21.4 percent to 20.3 percent. Size classes 10 to 19, 20 to

49, and 50 to 99 employees fell as well, by 0.4 percent,

0.2 percent, and 0.1 percent, respectively. While there

were some fluctuations over the business cycle, for firms

in classes 100 to 249, 500 to 999, and 1,000 or more employees shares were unchanged from their 1990 levels.17

(See table 3.)

When dividing firms into two size categories, 1 to 99

employees and 100 or more employees, the series shows

small 0.1 percent fluctuations, but has held constant over

the last 4 years. Size classes 1 to 499 employees and 500

or more employees show no change in firm share distribution throughout the series.

Even though the count of firms shows only a modest shift,with the addition of about 18 million employees

from 1990 to 2005, the distribution of employees shows

a more pronounced shift among the size classes.

Table 2 presents the distribution of employment by

size class at the end of the first quarter each year from

1990 to 2005. The employment share of firms with 5

or more employees rose from 41.4 percent of total employment in 1990 to 44.2 percent in 2005.Thus,the share

of employment in firms with fewer than 500 employees

has declined from 58.6 percent in 1990 to 55.8 percent

	 	

1	 5 	 10	 20	 50	 100	 250	 500	 1,000

to	 to	 to	 to	 to 	 to	 to	 to	 to

4	 9	 19	 49	 99	 249	 499	 999	 more	 	

 

  Level (in thousand

 

Gross job gains ...................... 6,581 945 761 788 943 602 647 391 319 1,185

		 At expanding firms............... 5,487 385 586 661 834 554 611 375 309 1,171

		 At opening firms .................. 1,094 560 175 128 109 48 35 16 10 14

 

Gross job losses..................... 6,257 911 740 763 906 574 610 367 298 1,088

		 At contracting firms.............. 5,181 388 574 638 795 520 566 346 285 1,070

		 At closing firms .................... 1,076 523 166 125 112 53 44 20 14 19

 

Net change............................. 324 34 21 25 37 28 37 24 21 97

 

 Share (percent)1

Gross job gains ...................... 100.0 14.4 11.6 12.0 14.3 9.1 9.8 5.9 4.8 18.0

 Expansions.......................... 100.0 7.0 10.7 12.0 15.2 10.1 11.1 6.8 5.6 21.3

 Openings ............................. 100.0 51.2 16.0 11.7 9.9 4.4 3.2 1.4 .9 1.3

 

Gross job losses..................... 100.0 14.6 11.8 12.2 14.5 9.2 9.7 5.9 4.8 17.4

 Contractions ........................ 100.0 7.5 11.1 12.3 15.3 10.0 10.9 6.7 5.5 20.6

 Closings............................... 100.0 48.6 15.4 11.7 10.4 5.0 4.1 1.9 1.3 1.7

 

Net change............................. 100.0 10.5 6.6 7.8 11.3 8.7 11.3 7.4 6.4 29.9

	Cumulative share of net

 change ............................... — 10.5 17.1 24.9 36.2 45.0 56.3 63.7 70.1 100.0

 

1 Share measures the percent of the category represented by each firm size class.

 

Category

Size class (number of employees)

Average quarterly level and percentage share of gross job gains and losses by firm size, second quarter 

1990 through third quarter 2005

Table 1.

Total

[Seasonally adjusted]
Monthly Labor Review • March 2007 43

in 2005. While shares fluctuate across the time serie

the smallest six size classes show a net decline. Size cla

250 to 499 employees has remained steady at 7.2 percent of employment,while size class 500 to 999 employees has gained 0.3 percent. The largest gain occured 

size class 1,000 or more employees,which has gained 2.5

percent of employment. These trends may demonstrate

that while large firms are gaining a higher share of total employment, small firms are growing and gradually

shifting to the large size group.

When comparing the change in employment shares

over time, similar results occur when large firms are defined at both the 100 and 500 employee levels. From

first quarter 1990 to first quarter 2005, firms with 500

or more employees experienced an increase of 2.8 percentage points in the share of total private employment,

while the change for firms with 100 or more employees

was 2.5 percentage points. The similar changes in employment shares for both boundaries may suggest that

rapidly growing firms continue their growth and settle in

	 	

	 1	 5 	 10	 20	 50	 100	 250	 500	 1,000	 1	 100	 1	 500

	 to	 to	 to	 to	 to 	 to	 to	 to	 to	 to	 or	 to	 or

	 4	 9	 19	 49	 99	 249	 499	 999	 more	 99	 more	 499	 more	

 

  Level (i

1990 ...... 89,278 4,809 5,951 7,255 10,354 7,870 9,593 6,461 5,826 31,158 36,239 53,038 52,293 36,985

1991 ...... 87,356 4,827 5,895 7,108 10,007 7,514 9,152 6,087 5,685 31,081 35,351 52,006 50,590 36,766

1992 ...... 87,024 4,872 5,914 7,094 9,935 7,412 9,053 6,075 5,626 31,042 35,228 51,796 50,356 36,668

1993 ...... 88,530 4,963 5,995 7,171 10,048 7,532 9,265 6,221 5,826 31,510 35,709 52,821 51,195 37,335

1994 ...... 91,214 5,026 6,093 7,338 10,384 7,748 9,662 6,518 6,021 32,425 36,588 54,626 52,769 38,445

1995 ...... 94,561 5,099 6,182 7,508 10,688 8,083 10,068 6,816 6,295 33,823 37,559 57,002 54,443 40,118

1996 ...... 96,531 5,139 6,227 7,580 10,863 8,254 10,318 7,017 6,576 34,558 38,062 58,469 55,397 41,134

1997 ...... 99,401 5,221 6,304 7,718 11,124 8,420 10,605 7,251 6,893 35,864 38,788 60,613 56,644 42,757

1998 ...... 102,204 5,244 6,316 7,782 11,236 8,548 10,851 7,466 7,146 37,615 39,127 63,078 57,443 44,761

1999 ...... 104,637 5,296 6,400 7,891 11,417 8,703 11,030 7,589 7,351 38,959 39,707 64,930 58,326 46,311

2000 ...... 107,672 5,299 6,446 8,051 11,677 8,941 11,286 7,942 7,557 40,473 40,414 67,258 59,642 48,030

2001 ...... 108,561 5,345 6,445 8,066 11,696 8,928 11,419 7,927 7,636 41,100 40,480 68,082 59,825 48,736

2002 ...... 105,810 5,377 6,468 8,036 11,591 8,685 11,051 7,591 7,271 39,742 40,156 65,654 58,797 47,013

2003 ...... 105,097 5,459 6,506 8,055 11,520 8,618 10,955 7,509 7,131 39,345 40,158 64,939 58,621 46,476

2004 ...... 105,915 5,528 6,591 8,141 11,661 8,731 11,028 7,614 7,200 39,421 40,652 65,263 59,294 46,621

2005 ...... 107,902 5,606 6,613 8,204 11,801 8,873 11,310 7,813 7,334 40,349 41,096 66,806 60,219 47,683

Share (percent)

1990 ...... 100.0 5.4 6.7 8.1 11.6 8.8 10.7 7.2 6.5 34.9 40.6 59.4 58.6 41.4

1991 ...... 100.0 5.5 6.7 8.1 11.5 8.6 10.5 7.0 6.5 35.6 40.5 59.5 57.9 42.1

1992 ...... 100.0 5.6 6.8 8.2 11.4 8.5 10.4 7.0 6.5 35.7 40.5 59.5 57.9 42.1

1993 ...... 100.0 5.6 6.8 8.1 11.4 8.5 10.5 7.0 6.6 35.6 40.3 59.7 57.8 42.2

1994 ...... 100.0 5.5 6.7 8.0 11.4 8.5 10.6 7.1 6.6 35.5 40.1 59.9 57.9 42.1

1995 ...... 100.0 5.4 6.5 7.9 11.3 8.5 10.6 7.2 6.7 35.8 39.7 60.3 57.6 42.4

1996 ...... 100.0 5.3 6.5 7.9 11.3 8.6 10.7 7.3 6.8 35.8 39.4 60.6 57.4 42.6

1997 ...... 100.0 5.3 6.3 7.8 11.2 8.5 10.7 7.3 6.9 36.1 39.0 61.0 57.0 43.0

1998 ...... 100.0 5.1 6.2 7.6 11.0 8.4 10.6 7.3 7.0 36.8 38.3 61.7 56.2 43.8

1999 ...... 100.0 5.1 6.1 7.5 10.9 8.3 10.5 7.3 7.0 37.2 37.9 62.1 55.7 44.3

2000 ...... 100.0 4.9 6.0 7.5 10.8 8.3 10.5 7.4 7.0 37.6 37.5 62.5 55.4 44.6

2001 ...... 100.0 4.9 5.9 7.4 10.8 8.2 10.5 7.3 7.0 37.9 37.3 62.7 55.1 44.9

2002 ...... 100.0 5.1 6.1 7.6 11.0 8.2 10.4 7.2 6.9 37.6 38.0 62.0 55.6 44.4

2003 ...... 100.0 5.2 6.2 7.7 11.0 8.2 10.4 7.1 6.8 37.4 38.2 61.8 55.8 44.2

2004 ...... 100.0 5.2 6.2 7.7 11.0 8.2 10.4 7.2 6.8 37.2 38.4 61.6 56.0 44.0

2005 ...... 100.0 5.2 6.1 7.6 10.9 8.2 10.5 7.2 6.8 37.4 38.1 61.9 55.8 44.2

March

of

year

Number of employees

Table 2. Distribution of employment by size class, March 1990 through March 2005

Total,

private

[Not seasonally adjusted]
Employment Dynamics

44 Monthly Labor Review • March 2007

the size class of firms with 500 or more employees. (S

table 2.)

The gradual increase in the relative employment share

of large size firms may be caused by the net effect of several factors.While some firms grow large enough over time

to become members of size class 500 or more employees,

there is a constant addition of employment from opening businesses in the smaller size classes. Size classes 1 to

4, 5 to 9, and 10 to 19 employees are the only classes to

have generated net gains from openings and closings over

this time series. In the third quarter of 2005, employme

gains at opening firms in all size classes constituted 16.5

percent of total gross job gains and 5.6 percent of net

employment growth. (See table 1.)

Additionally, it is possible that a number of firms that

grow rapidly over time may move into higher size classes, but may not surpass the 500 employee mark. The

growing firms do not affect the employment share of

large firms with 500 or more employees. These two factors can help to explain the inner workings of this gradual employment shift.

Although the general trend shows an increasing share

	 	

	 1	 5 	 10	 20	 50	 100	 250	 500	 1,000	 1	 100	 1	 500		

	 to	 to 	 to	 to	 to	 to	 to	 to	 or	 to	 to	 or	 or

	 4	 9	 19	 49	 99	 249	 499	 999	 more	 99	 more	 499	 more	

 

  Level (i

1990 ...... 4,226.6 2,222.8 906.3 540.4 343.7 114.6 63.6 18.8 8.5 7.9 4,127.9 98.7 4,210.2 16.3

1991 ...... 4,206.6 2,242.0 898.3 530.0 332.5 109.5 60.6 17.7 8.2 7.8 4,112.3 94.4 4,190.6 16.1

1992 ...... 4,226.3 2,264.0 901.4 528.9 330.1 108.0 60.1 17.7 8.2 7.8 4,132.5 93.8 4,210.3 16.0

1993 ...... 4,300.1 2,312.4 913.5 534.7 334.0 109.6 61.4 18.1 8.4 8.0 4,204.2 95.9 4,283.7 16.4

1994 ...... 4,377.3 2,344.6 927.8 547.2 345.0 112.7 64.1 18.9 8.7 8.3 4,277.3 100.0 4,360.3 17.0

1995 ...... 4,460.2 2,383.0 940.9 559.6 354.8 117.6 66.7 19.8 9.1 8.8 4,355.9 104.4 4,442.3 17.9

1996 ...... 4,508.1 2,408.6 947.2 564.7 360.3 120.2 68.4 20.4 9.5 8.9 4,400.9 107.2 4,489.7 18.4

1997 ...... 4,590.7 2,454.3 959.1 575.3 369.0 122.5 70.3 21.0 10.0 9.2 4,480.2 110.4 4,571.5 19.1

1998 ...... 4,621.0 2,470.0 960.9 579.6 372.9 124.3 71.8 21.6 10.4 9.6 4,507.6 113.4 4,601.1 19.9

1999 ...... 4,685.4 2,503.6 973.3 587.6 379.0 126.6 72.9 22.0 10.7 9.8 4,570.0 115.4 4,665.0 20.5

2000 ...... 4,719.3 2,504.4 979.8 599.0 387.4 130.0 74.7 23.0 11.0 10.1 4,600.5 118.8 4,698.2 21.1

2001 ...... 4,752.1 2,535.0 979.5 599.9 387.9 130.0 75.5 23.0 11.1 10.1 4,632.4 119.7 4,730.9 21.2

2002 ...... 4,761.0 2,552.8 983.5 597.9 384.7 126.7 73.1 22.0 10.5 9.8 4,645.6 115.5 4,740.7 20.3

2003 ...... 4,811.3 2,599.6 989.3 599.9 382.8 125.6 72.4 21.8 10.3 9.7 4,697.1 114.2 4,791.3 20.0

2004 ...... 4,876.5 2,639.0 1,002.0 605.8 387.4 127.2 72.9 22.1 10.4 9.6 4,761.5 115.0 4,856.4 20.0

2005 ...... 4,942.0 2,687.1 1,005.7 610.4 391.9 129.3 74.7 22.7 10.6 9.7 4,824.3 117.7 4,921.7 20.3

  Share (percent

 

1990 ...... 100.0 52.6 21.4 12.8 8.1 2.7 1.5 0.4 0.2 0.2 97.7 2.3 99.6 0.4

1991 ...... 100.0 53.3 21.4 12.6 7.9 2.6 1.4 .4 .2 .2 97.8 2.2 99.6 .4

1992 ...... 100.0 53.6 21.3 12.5 7.8 2.6 1.4 .4 .2 .2 97.8 2.2 99.6 .4

1993 ...... 100.0 53.8 21.2 12.4 7.8 2.5 1.4 .4 .2 .2 97.8 2.2 99.6 .4

1994 ...... 100.0 53.6 21.2 12.5 7.9 2.6 1.5 .4 .2 .2 97.7 2.3 99.6 .4

1995 ...... 100.0 53.4 21.1 12.5 8.0 2.6 1.5 .4 .2 .2 97.7 2.3 99.6 .4

1996 ...... 100.0 53.4 21.0 12.5 8.0 2.7 1.5 .5 .2 .2 97.6 2.4 99.6 .4

1997 ...... 100.0 53.5 20.9 12.5 8.0 2.7 1.5 .5 .2 .2 97.6 2.4 99.6 .4

1998 ...... 100.0 53.5 20.8 12.5 8.1 2.7 1.6 .5 .2 .2 97.5 2.5 99.6 .4

1999 ...... 100.0 53.4 20.8 12.5 8.1 2.7 1.6 .5 .2 .2 97.5 2.5 99.6 .4

2000 ...... 100.0 53.1 20.8 12.7 8.2 2.8 1.6 .5 .2 .2 97.5 2.5 99.6 .4

2001 ...... 100.0 53.3 20.6 12.6 8.2 2.7 1.6 .5 .2 .2 97.5 2.5 99.6 .4

2002 ...... 100.0 53.6 20.7 12.6 8.1 2.7 1.5 .5 .2 .2 97.6 2.4 99.6 .4

2003 ...... 100.0 54.0 20.6 12.5 8.0 2.6 1.5 .5 .2 .2 97.6 2.4 99.6 .4

2004 ...... 100.0 54.1 20.5 12.4 7.9 2.6 1.5 .5 .2 .2 97.6 2.4 99.6 .4

2005 ...... 100.0 54.4 20.3 12.4 7.9 2.6 1.5 .5 .2 .2 97.6 2.4 99.6 .4

March

of

year

Number of employees

Table 3. Distribution of firms by size class, March 1990 through March 2005

Total,

private

[Not seasonally adjusted]
Monthly Labor Review • March 2007 45

of employment for the larger size classes, this trend may

be halted or temporarily disrupted by the relative shares

of gross job gains and gross job losses in small and large

firms throughout the business cycle. (See tables 2 and 3.)

For example, during the recession of 2001, on average,

large firms, those with 500 or more employees, contributed 59.1 percent of net job losses; their share of employment began to drop and continued to do so until 2004.The

employment share of large firms still has not yet reached

its pre-recession level.In contrast, during the 1990–91 recession,small firms,those with fewer than 500 employees,

contributed an overwhelming 80.3 percent of net losses.

As a result, the employment share of large firms remained

unchanged in 1992 and continued to grow slowly until

2001.

Gross job gains and losses and business cycles. Do gross job

gains and gross job losses by firm size have business cycle

properties? To answer this question, we divided the time

series into four distinct periods:

• 1990–II to 1992–I: the quarters of net job lo

associated with the 1990–91 recession;

• 1992–II to 2001–I: the recovery and expansi

period after the early 1990–91 recession;

• 2001–II to 2003–II: the quarters of net job lo

associated with the 2001 recession; and

• 2003–III to 2005–III: the current recovery perio

If employers react similarly during various phases of

the business cycle, regardless of firm size, then the average quarterly shares of gross job gains and gross job losses would be expected to remain steady across size classes.

Table 4 and chart 1 show that firms of different size classes do indeed behave differently throughout these periods.

Moreover, a single class may not exhibit the same behavior during more than one recession or expansion. In fact,

firms with 1 to 499 employees and those with 500 or more

employees have had opposite impacts on the job market

during these two recessions.

Gross job gains for firms with 500 or more employees reached the prerecession level in the second quarter of

1993, nine quarters after the official end of the 1991 recession and started on an upward trend.These firms contributed, on average, 23.5 percent of gross job gains per

quarter during mid-1990s expansion period. This share

decreased slightly to 22.7 percent during the 2001 recession, and fell to 22.5 percent during the recovery period.

(See table 4 and chart 1.) As of the third quarter of 2005,

15 quarters after the official end of the 2001 recession,

gross job gains of these firms still have not recovered from

the 2001 recession, where gains still remain significantly

lower than the pre-recession level.

For small firms, those with 1 to 499 employees, gross

job gains reached levels seen before the 1991 recession in

the third quarter of 1993, only one quarter after the large

firms. Again, as with the large firms, gross job gains of

small firms have not yet recovered to pre-2001 levels.

In contrast, the gross job losses of both small and large

firms are currently at a level comparable to historical lows.

For large firms, the average quarterly share of gross job

losses began at 21.9 percent during the 1990s expansion,

and rose to 25.2 percent during the 2001 recession. The

average share of gross job losses has since dropped to 21.5

percent. (See table 4 and chart 1

These figures show that the increase in gross job losses

for firms with 500 or more employees contributed greatly

to net job losses during the recent employment contraction, far more than in the 1990–91 recession.While these

larger firms have contributed significantly to the current

employment expansion, present net gains do not appear to

be attributable to a rise in gross job gains, but rather to a

fall in the level of gross job losses.

Firms with 500 or more employees were responsible for

an average share of 59.1 percent of net jobs lost per quarter

during the 2001 recession and those job-declining quarters immediately following.This is in sharp contrast to the

39.2-percent share of net growth this size group experienced during the expansionary period following the 1990

recession. Firms with fewer than 500 employees contributed 40.9 percent of the net losses during the latest employment downturn and 60.8 percent of net job gains during the preceding expansion.18 (See table 4 and chart 1.)

This low level of gross job losses combined with middling

levels of gross job gains make the present recovery one of

less job losses rather than one of more job creation.

Recovery and rates of gross job gains and losses. During a

typical economic downturn, employers minimize their

workforce in order to adjust for the lower levels of aggregate demand. When the recession is over and demand

returns to pre-recession levels, laid-off workers are often

called back to work and job gains activities improve. O

should expect that in the course of the recession gross job

gains fall and gross job losses rise, causing a net loss in total employment. In the post recession period, if employees are called back or hiring is resumed in the affect

companies, gross job gains rise and gross job losses fall,

leading to net employment gains.

In the 2001 recession and recovery,this hiring and firing
Employment Dynamics

46 Monthly Labor Review • March 2007

   

   

Average quarterly level and share of net job change and gross job gains and losses during economic

recessions and expansion

Size class (number of

employees)

	 Level	 Share	 Level	 Share	 Level	 Share	 Level	 

	(thousands)	 (percent)	 (thousands)	 (percent)	 (thousands)	 (percent)	 (thousands)	 (percent)

	 Recession,	 Expansion,	 Recession,	 

	 1990-II–1992–I	 1992–II–2001–I	 2001–II–2003–II	 2003–III–2005–III

Table 4.

Net job 

	Total, private.................... –275 100.00 625 100.00 -467 100.00 442 100.00 

 1 to 4.............................. –10 3.69 45 7.25 14 –2.98 49 11.43

 5 to 9.............................. –21 7.60 36 5.69 –3 0.64 26 5.83 

 10 to 19.......................... –33 12.16 47 7.46 –16 3.50 33 7.26

 20 to 49.......................... –55 19.90 72 11.57 –40 8.52 52 11.29

 50 to 99.......................... –40 14.71 58 9.29 –42 8.98 41 8.99

 100 to 249...................... –42 15.12 74 11.82 –57 12.31 51 11.79

 250 to 499...................... –20 7.15 49 7.77 –46 9.88 35 7.48

 500 to 999...................... –7 2.37 42 6.77 –49 10.50 28 5.65

		1,000 or more ................ –48 17.30 202 32.38 –227 48.64 126 30.28

 1 to 99.......................... –159 58.06 258 41.26 –87 18.67 201 45.40

		100 or more ................... –115 41.94 367 58.74 –380 81.33 241 54.60

 1 to 499......................... –221 80.33 380 60.85 –191 40.86 287 64.96

		500 or more ................... –54 19.67 245 39.15 –276 59.14 155 35.04

Gross job 

	Total, private.................... 6,101 100.00 6,780 100.00 6,352 100.00 6,440 100.00

 1 to 4.............................. 904 14.81 949 14.00 937 14.75 973 15.12

 5 to 9.............................. 729 11.95 770 11.36 748 11.78 763 11.85

 10 to 19.......................... 753 12.34 802 11.83 772 12.16 781 12.12

 20 to 49.......................... 905 14.84 965 14.24 912 14.36 919 14.26

 50 to 99.......................... 583 9.56 621 9.16 569 8.96 574 8.92

 100 to 249....................... 617 10.11 672 9.91 607 9.56 612 9.50

 250 to 499....................... 364 5.97 408 6.02 366 5.76 371 5.77

 500 to 999....................... 286 4.68 336 4.95 299 4.71 303 4.71

1,000 or more ................. 959 15.72 1257 18.54 1,141 17.96 1,143 17.

 1 to 99............................. 3,875 63.51 4,108 60.59 3,939 62.01 4,010 62.27

100 or more .................... 2,227 36.49 2,672 39.41 2,413 37.99 2,430 37.

 1 to 499.......................... 4,856 79.59 5,188 76.51 4,912 77.32 4,994 77.54

		500 or more ................... 1,245 20.41 1,593 23.49 1,440 22.68 1,447 22.46

Gross job l

	Total, private.................... 6376 100.00 6155 100.00 6,819 100.00 5,998 100.00

 1 to 4.............................. 914 14.34 904 14.69 923 13.54 925 15.42

 5 to 9.............................. 750 11.77 735 11.94 751 11.02 737 12.29

 10 to 19.......................... 786 12.33 755 12.27 789 11.57 747 12.46

 20 to 49.......................... 960 15.06 893 14.51 952 13.96 867 14.45

 50 to 99.......................... 624 9.78 563 9.15 611 8.96 534 8.90

 100 to 249...................... 659 10.33 598 9.71 664 9.74 560 9.34

 250 to 499...................... 384 6.02 359 5.84 412 6.04 336 5.61

 500 to 999...................... 292 4.58 293 4.76 348 5.11 275 4.59

		1,000 or more ................ 1,007 15.79 1055 17.13 1,368 20.06 1,017 16.95

 1 to 99............................ 4,034 63.27 3,850 62.55 4,026 59.05 3,810 63.51

		100 or more ................... 2,342 36.73 2,305 37.45 2,792 40.95 2,189 36.49

 1 to 499.......................... 5,077 79.63 4,808 78.10 5,102 74.83 4,707 78.46

 500 or more ................... 1,299 20.37 1,348 21.90 1,716 25.17 1,292 21.54

[Seasonally adjusted]
Monthly Labor Review • March 2007 47

regime was not followed. Gross job gains fell at the ons

of the downturn while gross job losses increased dramatically, resulting in a net loss in employment. After the official end of the recession during the fourth quarter of 2001,

gross job gains rose for one quarter and then resumed a

downward trend, lasting until the third quarter of 2003.

Gross job losses, however, peaked in the middle of the recession, the third quarter of 2001, returned to pre-recession levels in the first quarter of 2002, and then continued

to fall until the fourth quarter of 2002.The improvement

in the job market, therefore, was initiated by a slowdown

in the pace of gross job losses, not by a stream of gross job

gains. This phenomenon—the fall of gross job gains rat

and a historically low level of gross job loss rates—is evident in all size classes and continues up to the third quarter of 2005, the latest quarter for which data were available.19 (See chart 2.) For example, the rate of gross job

gains in firms with 500 or more employees was 3.6 percent in the fourth quarter of 2000, and fell to 3.3 percent

by the third quarter of 2005. Gross job losses howeve

fell from 3.3 percent to 2.7 percent over the same period. Firms with fewer than 500 employees showed similar

changes, with the rate of gross job gains falling from 8.7

percent to 8.3 percent and the rate of gross job losses falling from 8.5 percent to 7.8 percent. In both of these size

classes, drops in the rate of gross job losses exceeded declines in the rate of gross job gains, causing a positive net

change in total employment. Therefore the current recovery of the labor market has been mainly the result of decreased gross job losses, rather than increased gross j

gains.

In other words,these net employment gains appear to be

predominantly from fewer layoffs, plant closings and other labor force reducing events, and to a lesser extent from greater

business openings and expansions that the economy typically experiences during an economic recovery.

Additionally, note that the rates of gross job gains of

these two size classes peaked at different points preceding the 2001 recession. (See chart 2.) The rate of gross

job gains in firms with 1 to 499 employees (small firms)

peaked in 2001,while the rate for firms with 500 or more

employees (large firms) peaked far earlier, in 1998. As t

BED size class data series continues over time, it will be

interesting to see if this early reaction of large firms to an

20

15

5

0

25

30

35

Expansion2

second quarter 1992–

first quarter 2001

Recession3

second quarter 2001–

second quarter 2003

Recovery4

third quarter 2003–

third quarter 2005

Percent

50

Recession1

second quarter 1990–

first quarter 1992

Average quarterly share of net change for firms with 1 to 499 employees and firms with 500 

or more employees during the business cycle, 1990–2005

10

35

30

25

20

15

10

5

0

40

50

Percent

40

Business cycle period

1 Quarters of net job loss associated with the 1990–91 recession. 2 Recovery and expansion period. 3 Quarters of net job loss associated with the 2001 recession. 4 Current recovery period.

1 to 499 employees

500 or more employees

Chart Chart1.1.
Employment Dynamics

48 Monthly Labor Review • March 2007

Gross job gains and gross job losses as a percent of employment in private sector firms, June 

1990–March 2005, seasonally adjusted

Chart 2.

Firms with less than 500 employees

Firms with 500 or more employees

Percent Percent

Percent Percent

11

10

9

8

7

11

10

9

8

7

1990 1992 1994 1996 1998 2000 2002 2004 2006

5

4

3

2

5

4

3

2

1990 1992 1994 1996 1998 2000 2002 2004 2006

Gross job gains

Gross job losses

Gross job losses

Gross job gains

NOTE: Shaded area represents recession period.
Monthly Labor Review • March 2007 49

economic downturn constitutes a pattern and if it could

perhaps be used as a leading indicator of what lies ahead

in the job market.

Job reallocation rate and size of firm. The job reallocation

rate is the sum of the rate of gross job gains and the rate

of gross job losses.This figure may be used as a measure

of job turnover, the “churning” beneath the surface of the

job market. Data on job reallocation rates by firm size reveal two facts. First, the average job reallocation rates for

each class are inversely related to the size of the firms.

This means the larger firms have lower turnover rates.

(See chart 3.)

Second, job reallocation rates for all size classes are declining. The rates for all size classes have been relatively

flat throughout the 1990s expansion period and are now

on a decline during the current recovery. These low post

recession job reallocation rates stem mainly from a fall in

the rate of gross job losses.

IN SUM,THE FOLLOWING FINDINGS result from analysis of BLS firm size class dat

•  Small firms, those with 1 to 499 employees, create

about 64 percent of new jobs.

•  The share of growth of small firms is larger than

their base share of employment.This growth, however, causes small firms to become large, increasing the

employment share of large firms over time.

•  Firms of different size classes behave differently

throughout the phases of the business cycle.The contribution of large firms to the net job gains during

the current economic recovery appears to have come

from a fall in the level of gross job losses, rather than

increased job creation. The share of gross job gains

for this group has not yet reached its pre-recession

levels.

•  The bulk of net job losses in the 1991 recession occurred in small firms, while large firms have generated the majority of job losses during the economic

slowdown of 2001.

Average job allocation rates by firm size, second quarter 1990 through third quarter 2005

Rate Rate

1 to 4 5 to 9 10 to 19 20 to 49 50 to 99

Chart 3.

40

35

30

25

15

10

20

5

0

40

35

30

25

15

10

20

5

0

100 to 249 250 to 499 500 to 999 1,000 or more

Size class (number of employees)
Employment Dynamics

50 Monthly Labor Review • March 2007

NOTES

1

Steven J. Davis, John C. Haltiwanger, and Scott Schuh, Job Creation and Job Destruction, (Cambridge, MIT Press, 1966), Chapter 

2 Cordelia Okolie,“Why size class methodology matters in analyses of net and gross job flows,” Monthly Labor Review, July 2004, p

3–12.

3 Per Davidsson, “Methodological Concerns in the Estimation of

Job Creation in Different Firm Size Classes”Jönköping International Business School (1996 Working Paper) on the Internet at: http://

www.ihh.hj.se/eng/research/publications/wp/1996–1%20Davidsson.pdf (accessed June 2005); and Per Davidsson, Leif Lindmark,

and Christer Olofsson,“The Extent of Overestimation of Small Firm

Job Creation—An Empirical Examination of the Regression Bias,”

Small Business Economics, 1998, pp. 87–100.

4 Prior to third quarter 1992, Multiple Worksite Report processing had not become fully operational. Because the BED data series is

based at the establishment level, data is published beginning at this

point,where firms composed of multiple establishments could submit

data for each establishment. However, because this size class analysis is based at the firm level, these breakouts are not necessary. For the

purpose of this research, the data series has been expanded back to

second quarter 1990 in order to demonstrate the differences between

the 1990 and 2000 recessions. Due to the improvements in reporting,

caution should be used when comparing data collected before and after September 199

5 For more details on gross job flows, see Davis, Haltiwanger, and

Schuh, Job Creation and Job Destruction; John M. Abowd, John Haltiwanger, and Julie Lane,“Integrated Longitudinal Employer-Employee Data for the United States,”American Economic Review: Papers and 

Proceedings, May 2004, pp. 224–29; Timothy R. Pivetz, Michael A.

Searson, and James R. Spletzer, “Measuring job and establishment

flows with BLS longitudinal microdata,”Monthly Labor Review, April

2001, pp. 13–20.

6 Timothy Dunne, Mark J. Roberts, and Larry Samuelson, “Patterns of Firm Entry and Exit in U.S.Manufacturing Industries,”Rand 

Journal of Economics,winter 1988,pp.495–515;Timothy Dunne,Mark

J.Roberts, and Larry Samuelson,“Plant Turnover and Gross Employment Flows in the U.S. Manufacturing Sector,”Journal of Labor Economics, January 1989, pp. 48–71; Davis, Haltiwanger, and Schuh, J

Creation and Destruction; James R. Spletzer, “The Contribution of

Establishment Births and Deaths to Employment Growth,” Journal of Business and Economic Statistics, January 2000, pp. 113–26; and

Christopher L. Foote “Trend Employment Growth and the Bunching of Job Creation and Destruction,” Quarterly Journal of Economics,

August 1988, pp. 809–34.

7 It is important to note that gross job gain and gross job loss statistics measure the sum of firm level net employment changes, and do

not measure the flow of individual workers into and out of the unit.

For example, if a firm increases employment from 50 workers to 60

workers, these 10 additional jobs are classified as gross job gains. Th

addition of 10 jobs during the quarter may have occurred with the addition of 10 new hires, or through any combination of hires and separations. Counts of hires and separations are published monthly by

the Job Openings and Labor Turnover Survey (JOLTS) program at

the BLS.

8 For more on BED concept and methodology,see JamesR.Spletzer,

R. Jason Faberman, Akbar Sadeghi, David M. Talan, and Richard L.

Clayton, “Business Employment Dynamics,” Monthly Labor Review,

April 2004, pp. 29–42.

9 Shail J. Butani, Richard L. Clayton, Vinod Kapani, James R.

Spletzer, David M. Talan, and George S. Werking, Jr., “Business Employment Dynamics: tabulation by employer size” Monthly Labor Review, February 2006, pp. 3–22.

10 Davidsson, “Methodological Concerns in the Estimation of Job

Creation in Different Firm Size Classes”; and Davidsson, Lindmark,

and Olofsson,“The Extent of Overestimation of Small Firm Job Creation—An Empirical Examination of the Regression Bias.”

11 See Guide to SBA’s Definitions of Small Business, on the Internet

at http://www.sba.gov/size/indexguide.html.

12 Organizations include National Association for the Self-Employed (www.nase.org); Micro Business Development (www.microbusiness.org); Micro-Business USA (www.microbusinessusa.org);

Micro Business Cooperative Extension (http://fcs.okstate.edu/microbiz/).

13 Derek Leebeart,“How Small Businesses Contribute to U.S.Economic Expansion.”E-Journal USA: Economic Perspective, January 2006.

14 Long-term average share is used in this analysis. The shares of

size classes in gross job gains, gross job losses, and net change in employment are highly seasonal and cyclical. For example, the net change

share for firms with 500 or more employees was 14.3 in the second

quarter of 2005, but rose to 48.1 percent in the third quarter of 2005.

15 D. Birch, The Job Generation Process, Final Report to Economic 

Development Administration, Program on Neighborhood and Regional 

Change (Cambridge, MIT Press, 1979); J. Baldwin and G. Picot, “Employment Generation by Small Producers in the Canadian Manufacturing Sector,” Small Business Economics, 1995, pp. 317–31; and P. Davidsson, L. Lindmark, and C. Olofsson, “The trend toward smaller

scale during the 1980’s: empirical evidence from Sweden,” paper presented at ICSB’s 40th World Conference, Sydney, June 1995.

16 For a detailed discussion on small firm job creation debate, see

Per Davidsson, “Methodological Concerns in the Estimation of Job

Creation in Different Firm Size Classes.”

17 Please note that these figures are not seasonally adjusted and are

compared on an annual basis.

18 For more information on comparing these two recessions, see

Shail Butani, George Werking, and Vinod Kapani, “Employment dynamics of individual companies versus multicorporations,” Monthly Labor Review, December 2005, pp. 3–15; and Jason R. Faberman,

“Gross Job Flows over the Past Two Business Cycles: Not all ‘Recoveries’ are Created Equal,” BLS Working Paper, 2004.

19 Gross job gains and gross job losses for any size class are expressed as rates by dividing their levels by the average of employment

in the current and previous quarters.This provides a symmetric growth

rate. The rates are calculated for the components of gross job gains a

gross job losses and then summed to form their respective totals.These

rates can be added and subtracted just as their levels can. For instanc

the difference between the gross job gains rate and the gross job losses

rate is the net growth rate.