Update: New Business Formation in Wyoming
by: Xiaohong (Sherry) Yu

"Less than half (43.7%) of the new firms survived after the first three critical years. New firms are associated with disproportionately higher UI claims than other established businesses."

Too often in today’s economy new businesses are merged, sold, or go out of business soon after they are born. Owners have to face not only local or domestic competition but also international competition. It has been two years since the last new business study, "A Study of Wyoming’s New Business Formation" (refer to the April 1997 issue of Wyoming Labor Force Trends). How have new businesses fared in Wyoming during the past two years? What proportion of them are still part of the state’s industry base? What significant differences characterize current business formation compared with previous studies? This article will answer those questions.

Development of New Business⁽¹⁾

During the past five years, Wyoming had an increasing number of new firms starting their businesses each year, from 1,741 firms in 1993 to 1,851 firms in 1997, except in 1996 with only 1,667 (see Figure 1). The industry distribution of new firms (see Figure 2) was quite consistent over the years. Using 1997 data as an example, most (70.5%) new firms opened business in Services (36.0%), Construction (19.2%) and Retail Trade (14.8%). Very few started business in Agriculture (2.8%), Mining (3.7%) and Manufacturing (3.7%) industries. Figure 3) shows the historical data by quarter. More employers started their businesses in the second or third quarter of the year, but there was no significant start-up preference on specific quarters for most of the industries (see details in Table 1).

On average, new firms added 1,180 new jobs and 5.4 million dollars in wages in the quarter in which they started their businesses. These numbers directly affect the employment and wage statistics of the state. Figure 3 shows that from the third quarter of 1996 the starting quarter’s wages for new businesses reflected a continuously higher growth rate--averaging 49.8 percent on the over-the-year same quarter comparison--than the employment growth rate which averaged 20.5 percent. This large growth brought the starting quarter’s average weekly wage up from $325 in 1995 to $432 in 1997, a 32.9 percent increase. What caused it? Does it mean the structure of the new firms or the new jobs changed over time? Further study needs to be done in order to give a complete explanation.

New Firms and Employment by Region and County

The Southwest and Southeast have been the fastest growth regions in the state for the past five years. Each had over 21 percent of new firms every year. The Northeast was the slowest developing area, with only 15 percent of new firms. More firms tend to locate in the counties with large cities or towns (high population areas). Laramie, Natrona and Teton Counties attracted the largest number of new firms each year (see Table 2). In 1997, for example, 254, 209 and 188 new firms opened for business in these three counties, respectively.

Statewide, over 6,500 job opportunities⁽²⁾ were created by new firms each year (see Table 2). This number rose to 7,474 in 1996 and 7,833 in 1997. The geographic distribution of these new jobs is consistent with the new firms’ distribution. Laramie County had more than 1,000 new jobs added by new firms each year. Natrona and Campbell Counties each had more than 800 new jobs in 1997, and Teton had 651.

Starting Business Size by Industry

Most (about 84% each year) new firms hired only five or fewer employees during their first two quarters of business operation (see Table 3). Some of them (about 4% of the total) only hired temporary workers⁽³⁾. These employers’ average quarterly employment was zero for both beginning quarters, but their wage data showed that they paid somebody some time during the quarter. Only three percent or less started with 21 or more employees. The majority of these were in Retail Trade, Services and Construction industries. Wholesale Trade and Finance, Insurance, & Real Estate (FIRE) industries had the highest percentage (over 90%) of small-sized new firms (five or fewer employees).

Business Survival and Layoffs

On average, 1,761 new firms opened their businesses in Wyoming each year and created an average of 7,141 new jobs annually. How are they doing over time? What are the survival rates? Which industry’s firms had the best luck in Wyoming? How many jobs were still attached to these firms? What proportion of layoffs were from them? How does their job loss rate compare with other firms?

By definition, firms which still report wages to the Unemployment Insurance (UI) division on their first anniversary in business are considered a one year survival. A similar concept applies to each year’s survival analysis. An important point to remember is that the business survival rate in this study applies only to firms owned continuously by the same owner(s). Some firms may still operate but have changed owners. For simplicity, these kinds of firms were not included in the current study since too many different and complex situations could occur. For example, several firms could merge into one big firm, or one firm could split into several different smaller firms. A business could be bought and sold several times, or it could be temporarily out of business for a couple of quarters before an ownership transfer is settled. However, a quick check was conducted. Out of 9,721 firms in the study database, 4,909 firms were "inactive"--reporting no employment and wages to UI in the first quarter of 1998. This may mean that a firm has gone out of business, had its ownership transferred, temporarily stopped operation for the season, etc. Matching these "inactive" firms with the most recently available Quarterly Unemployment Insurance (QUI) reports (the first quarter of 1998), 9.6 percent (469) of them were found to have transferred ownership. The other 90.4 percent (4,440) of them are still "inactive." This result indicates that the survival analysis in this study closely represents all new firms’ survival situation.

In the study database, 7,639 firms had their first anniversary in business, 6,010 had two years, 4,174 had three years, 2,464 had four years and only 672 had a fifth birthday. Survival rates diminish as the years pass, 66.6 percent of the firms survived after one year in business, but only 35.3 percent were still active on their fifth anniversary (see Table 4). Firms in Public Administration had the best luck, almost everybody survived over the years. FIRE is second best and Agriculture is third with 61.8 percent and 59.4 percent of the firms surviving respectively after five years in business. Manufacturing and Construction had the least luck with only 5.3 percent and 15.6 percent of firms continuing their businesses after five years, respectively. Figure 4 shows survival rates by starting employment size. Larger sized firms had a much better chance to survive than smaller sized firms on all five anniversaries. Firms using only temporary workers had the lowest survival rates for all of the years compared with other firms. This result should not be surprising since large firms require more capital investment and more planning to justify it. They also usually have larger volumes of business and more diversified products or services than the small firms, making them more competitive.

During the 12 months ending June 30, 1998, a total of 16,670 layoffs occurred in Wyoming which showed up as UI initial and additional claims (see Table 5). The new firms in this study were responsible for 16.2 percent (2,694) of them. This share varied among industries. Wholesale Trade and Construction had higher percentages than others. Over all, 16 percent seems relatively low. However, if compared with the average employment level for the corresponding time period, these new firms--which had five years or less experience in business--had a much higher job loss rate⁽⁴⁾ (11.9%) than the firms who were in business longer (the rate was 7.2%). Job loss rate indicates the probability of being laid off in a specific time period. In other words, about 12 of every 100 employees in the new firms would likely lose their jobs during the year while only seven of them would have the same experience if they worked in other more established firms. This difference indicates that the new firms are not as stable as the older firms; lack of business experience may be one of the main reasons.

Summary

In the past five years, Wyoming had an increasing number of new firms each year, from 1,741 firms in 1993 to 1,851 firms in 1997, except in 1996 with only 1,667 new firms. Most (over 70.5%) of them were in Services (36.0%), Construction (19.2%) and Retail Trade (14.8%) industries. The majority (about 84%) of them started at a small size (five or fewer employees). Less than half of them (43.7%) survived after the first three critical years. Firms in Public Administration, FIRE and Agriculture had a better chance at survival over the years. Large firms also had much higher survival rates than small firms. New firms are associated with disproportionately higher UI claims than other established businesses.

Xiaohong (Sherry) Yu is a Senior Economist, specializing in UI Trust Fund projections.

1 New business data source and definition: the current research relies on a database containing an additional eight quarters (1996 Q2 - 1998 Q1) of new business information since the last study. The database includes a total of 22 quarters (1992 Q4 - 1998 Q1) and 9,721 new-firms records. It is generated by matching two major data sources: new business Unemployment Insurance registrations and the employer Quarterly Unemployment Insurance (QUI) reports. An important point to remember is that there are extensive edits and updates on each quarter’s QUI data before it can be used in other statistics or be part of the national statistics according to the Bureau of Labor Statistics’ (BLS) requirement, but the same updating will not affect the new registration database. As a result, some fields (such as county code and SIC code) are changed on the QUI and may not be consistent with the new registration, so some records will not be matched. In order to avoid losing records, some unnecessary matching criteria such as county codes were taken out this time. This adjustment results in the historical data of new firms for each quarter in the current study being slightly higher than the previous studies, since they include some records that have been missed before.

As mentioned in the previous articles, new businesses in this study are the real new and active ones. The new branches of existing firms or the new firms based on the ownership transfer of the old firms are not included. The new registered firms who never showed up in the QUI with effective employment or wage records are not included in this study since they are not considered active firms. Some employers may have changed their minds on when to start their businesses or if they are indeed going to start a business after the initial registration with the Employment Resources Division.

2 The employment number we used here and later on is different from the number in Figure 3. In Figure 3, the employment is the average quarterly employment at the business starting quarter, which is consistent with the calculation of total UI covered employment statistics. The purpose of those numbers is to show how big of an impact the new businesses had on quarterly UI covered employment and wage statistics. The following employment number is defined as the "real" beginning level of employment, which is the highest average quarterly employment during the first two quarters. Many new firms started their businesses in the second or third month of the quarter. The actual starting quarter’s average employment cannot reflect the actual beginning hiring level. For example, if a firm opened its door in the last month of the quarter and hired ten people, the average employment for this quarter would be only three (total quarterly employment divided by three months) instead of ten. Using "real" beginning level of employment gives every firm an equal chance to show their actual beginning hiring level.

3 According to BLS requirements, firms only need to report their employment for the week which includes the 12th of the month. As a result, if a firm only uses temporary workers in a week other than the reporting week, its employment would be reported as zero.

4 Job loss rate equals total layoffs during the year divided by average UI covered employment for the year.

Table of Contents | Labor Market Information | Employment Resources | Send Us Mail

These pages designed by Gayle C. Edlin.
Last modified on by Valerie A. Davis.