Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications

Abstract

This paper investigates the connection between the heterogeneity of establishment-level employment changes and aggregate fluctuations at business cycle frequencies. Our empirical work exploits a rich data set with approximately 860,000 annual observations and 3.4 million quarterly observations on 160,000 manufacturing establishments to calculate rates of gross job creation, gross job destruction, and their sum, gross job reallocation. Three central messages emerge from the research in this paper: First, establishment-level employment changes exhibit tremendous heterogeneity, even within narrowly defined sectors of the economy. This heterogeneity manifests itself in terms of high rates of gross job creation, destruction, and reallocation. Furthermore, the magnitude of this heterogeneity varies significantly over time; most of the variation is due to time variation in the idiosyncratic component of establishment growth rates, and the variation is significantly countercyclical. Second, our theoretical model of employment reallocation and business cycles is suggestive of how both aggregate and allocative disturbances can drive fluctuations in job creation, job destruction, unemployment, productivity, and output. Third, our empirical analysis of the joint dynamics of job creation and destruction supports the view that allocative disturbances were a major driving force behind movements in job creation, job destruction, job reallocation, and net employment growth in the U.S. manufacturing sector during the 1972 to 1986 period.