Using Worker Flows to Measure Firm Dynamics

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Introduction

Economists recognize that resource allocation and reallocation is fundamental to the process of wealth creation. And since the basic building-block of such reallocation is the firm, accurately tracking firm dynamics is critical to understanding the process. Recent empirical analysis of firm-level micro data has confirmed this. The U.S. economy is characterized by substantial turbulence — firms incessantly enter and exit, merge, acquire other firms, and reallocate workers — and this turbulence significantly affects productivity and economic growth. Yet that same empirical analysis has also identified serious measurement challenges to those in the datasets that are used to measure and analyze these important events.

These measurement challenges are a consequence of both the data collection approach used by statistical agencies and the ubiquitous restructuring process of the population of firms. The standard approach to measuring firm demographics is to collect either administrative or survey data on establishments and firms and in turn to longitudinally link these business entities with establishment and firm identifiers. It has long been recognized that the use of administrative data to capture firm entry, exit and merger/acquisition, while providing excellent coverage and consistency, does pose important technical challenges to the accurate measurement of firm transitions. Because administrative identifiers are typically used to identify firms, spurious transitions may result from administrative, rather than economic changes. While many agencies use surveys to complement administrative business frames, these surveys are not only difficult to design and implement but statistical agencies are rightly concerned about the burden on respondents.

Underlying both the administrative and economic changes are rich firm dynamics as firms are constantly reinventing themselves through the entry and exit of establishments, the entry and exit of firms, mergers and acquisitions, outsourcing, changes in ownership, changes in legal form of organization and changes in the products and services produced by the establishments and the firms. As noted, administrative identifiers typically change along with these changes as they should but it is important to understand the source of the underlying change. For example, a firm that simply changes ownership or changes legal form of organization may have a change in administrative identifiers but no other change in economic activity so it is important to follow that link. Alternatively, a spin-off or outsourcing activity obviously involves an economic change but it is also important and useful to follow that link as well.

In this paper, we explore these administrative and economic changes using a novel approach that takes advantage of the development of new datasets that incorporate the interrelationship between workers and firms. These new datasets integrate employer and employee data so that both firms and workers and their relationships can be followed over time. In this paper we describe how these new datasets can use information about the flows of clusters of workers across business units to identify longitudinal linkage relationships in the longitudinal business data. These longitudinal relationships may be the result of either administrative or economic changes and we explore both types of newly identified longitudinal relationships. In particular, we develop a set of criteria based on worker flows to identify changes in firm relationships — such as mergers and acquisitions, administrative identifier changes and outsourcing. We demonstrate how this new data infrastructure and this cluster flow methodology can be used to better differentiate true firm entry/exit and simple changes in administrative identifiers. We explore the role of outsourcing in a variety of ways but in particular the outsourcing of workers to the temporary help industry². While the primary focus is on developing the data infrastructure and the methodology to identify and interpret these clustered flows of workers, we conclude the paper with an analysis of the impact of these changes on the earnings of workers. The ongoing restructuring of firms through all of these channels (e.g., outsourcing or changes in ownership, mergers and acquisitions) potentially impact workers earnings as these changes imply some change in the way that firms are organizing themselves and doing business.

The paper proceeds as follows. Section 2 provides some more background motivation. Section 3 provides an overview of the LEHD Program at Census and the data infrastructure at LEHD. Section 4 describes the data used for this particular study and an overview of the approach taken here. Section 5 presents results from this analysis of the flows of clusters of workers. Section 6 presents concluding remarks.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Acknowledgments

This document reports the results of research and analysis undertaken by the U.S. Census Bureau staff. It has undergone a Census Bureau review more limited in scope than that given to official Census Bureau publications, and is released to inform interested parties of ongoing research and to encourage discussion of work in progress. This research is a part of the U.S. Census Bureau's Longitudinal Employer-Household Dynamics Program (LEHD), which is partially supported by the National Science Foundation Grant SES-9978093 to Cornell University (Cornell Institute for Social and Economic Research), the National Institute on Aging, and the Alfred P. Sloan Foundation. The views expressed herein are attributable only to the author(s) and do not represent the views of the U.S. Census Bureau, its program sponsors or data providers. Some or all of the data used in this paper are confidential data from the LEHD Program. The U.S. Census Bureau is preparing to support external researchers' use of these data; please contact U.S. Census Bureau, LEHD Program, FB 2138-3, 4700 Silver Hill Rd., Suitland, MD 20233, USA. We appreciate the useful comments of Katherine Abraham, Fredrik Andersson and Jim Spletzer. John Abowd provided valuable guidance in structuring the approach.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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