Signs of a healthy economy include high levels of business dynamism, which can be measured as the rate of jobs created or destroyed, firms entering or exiting an area, and establishments entering and exiting the marketplace.A firm is an establishment or combination of establishments; an establishment is a single physical location where business activity takes place—as defined by the Bureau of Labor Statistics. While dynamism rates have fallen nationally since the 1980s, the decline is not equal across U.S. cities, according to a recent Regional Economist article.
“Small cities have seen larger decreases than big cities, and today, big cities exhibit much faster rates of business dynamism than small ones,” wrote Economist Hannah Rubinton and Research Associate Maggie Isaacson.
Rubinton and Isaacson used the establishment entry to measure business dynamism for cities within the Eighth Federal Reserve DistrictThe Eighth Federal Reserve District includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. and for those in the rest of the U.S. They used data from the Census Bureau’s Business Dynamics Statistics.
SOURCES: Business Dynamics Statistics, the Longitudinal Business Database and authors’ calculations.
Rubinton and Isaacson then examined the data by industry. They found that industries in cities in the rest of the country generally had greater rates of establishment entry than those of cities in Eighth District. For most of the industries that they studied, the rest of the U.S. had an average difference of 1.43 more new establishments for every 100 establishments.
There were two industries for which the Eighth District had higher rates of dynamism: health care and management, the authors noted.
“The Eighth District has roughly one more new management establishment for every 100 management establishments per year and 3.5 more new health care establishments for every 100 health care establishments than the outside region,” Rubinton and Isaacson wrote.
The rest of the industries had lower rates of dynamism in the Eighth District compared with the rates in the rest of the country. This indicates that industry composition cannot explain the difference between dynamism rates, they noted.
When they looked at data by population, the authors found that the relationship between the dynamism rate and city size were similar inside and outside the Eighth District: The larger the city, the higher the establishment entry rate.
“Thus, the likely cause of the lower dynamism rates is that cities in the Eighth District are smaller than cities outside the Eighth District,” they wrote.
According to an Economic Synopses article from earlier this year, a higher population probably increases competition between firms, and unproductive firms are more likely to exit the market with higher competition, which allows for newer, more productive firms to enter the market.
The Eighth District dynamism rates were generally lower than the rates for the rest of the country. Health care and management were the two industry sectors in which dynamism rates were higher inside the District than outside the District.
“However, when compared with cities of similar sizes, there is no discernable difference in overall dynamism rates between Eighth District cities and cities outside the Eighth District,” they concluded.