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Copyright 1997 by the Wyoming Department of Employment, Research & Planning


A Study of Wyoming's New Business Formation

A Continuation of the Article, "New Business Formation: An Economic Development Indicator"

by: Xiaohong (Sherry) Yu


Policy makers may want to know how many new firms start up in Wyoming each year, their industry affiliations, their geographic distribution, etc. As a banker, asked for a loan to finance a business, or an employer thinking about setting up a new business, you may be more concerned about the possibility of business survival. Even as an "average person", you may also want to know something about new job opportunities and wage levels associated with those new jobs.

This study provides some very useful information for all of the above concerns. It continues the research started in "New Business Formation: An Economic Development Indicator" (refer to the June 1995 issue of Wyoming Labor Force TRENDS), and includes an additional six quarters of new business information(1).

A knowledge of new business formation taken in conjunction with other information on the economy and labor market may prove to be a useful index of local economic health. The purpose of this article is to extend the discussion about business formation with the intent of eventually using business formation as an economic indicator.

The study database was generated by matching the new business unemployment insurance registrations with each quarter's employer Quarterly Unemployment Insurance (QUI) database. From this matching, we obtain information about when each new business became active, actually hired employees and had wages reported in the QUI, its employment level and total wage level for each quarter. Besides the original 3,078 records from the 1995 study, another 2,431 new business records were added to this study's database. As a result, we have 14 quarters of new business information available for study, from the fourth quarter of 1994 (1994 Q4) to the first quarter of 1996 (1996 Q1). This makes it possible for us to examine the time series by quarter and also do some analyses by calendar year (from 1993 to 1995)(2).

The new businesses included in this study are truly new firms with no predecessor. The new branches of the existing firms, such as national chain stores, are not included as separate new firms. So what is new in the current study?

New Business Formation Over Time

From 1993 to 1995, an increasing number of new firms started their businesses in Wyoming (1,560, 1,618 and 1,683, sequentially). The statewide average annual growth rate(3) for new businesses was 3.9 percent since 1993. However, the centered moving average(4) (see Figure 1), shows a flat underlying trend over the quarters (1992 Q4 - 1996 Q1). It indicates that during this period, there was no significant tendency for the level of new business formation to change.

Different industries, however, had significantly different growth paths in new business formation (see Figure 2). Public Administration, Manufacturing and TCPU (Transportation, Communications, & Public Utilities--Electric, Gas, and Sanitary Services) were the three industries that had annual growth rates greater than 20 percent; Public Administration's high annual growth rate was due to a small number of new businesses. Wholesale Trade and FIRE (Finance, Insurance, & Real Estate) had 9.3 and 8.9 percent growth rates, respectively. However, Agriculture, Forestry, & Fishing had a decreasing number of new start-up firms in 1994 and 1995 compared with 1993.

Employment and Wages

The new businesses brought more than 4,300 new employment opportunities each year for the whole state with each firm generating an average of three new jobs. The average weekly wage at the starting quarter of the business was $266, $294 and $286, respectively, from 1993 to 1995. Table 1 provides information on the number of new jobs and wage levels by region and counties, and Table 2 presents the same information by major industries.

Statewide, there were 4,748 new job(5) opportunities created by new businesses in 1993, 4,378 in 1994 and 4,562 in 1995. In terms of regional distribution, Laramie and Natrona Counties had the largest share of new job opportunities: Laramie had 633 new jobs in 1993, 646 in 1994 and 730 in 1995, while Natrona had 696, 587 and 459. In terms of industrial distribution, more than half of the new jobs were in Retail Trade and Services (see Table 2). The industry that provided the next highest number of new job opportunities was Construction, with 769, 969 and 847 new jobs in those three years.

The average weekly wages provided by the new start up firms were $266 in 1993, $294 in 1994 and $286 in 1995 (see Table 2). Compared with the industry-wide average weekly wages, the new firms paid relatively lower wages to their employees across the industries. Those lower wages, however, should not be surprising if we consider the employees' tenure as one of the major wage factors. In other words, the lower wages may just reflect the fact that most employees working for those new firms are also new, working less than a full quarter, and may be inexperienced for their jobs, so they were paid at a (lower) starting wage.

Beginning Firm Size

Table 3 shows the distribution of new businesses by size. More and more new businesses are starting as small firms. In 1993, 89.4 percent of the new start up firms hired five or less employees. By 1995, the proportion had increased to 92 percent. Except for Agriculture, Forestry, & Fishing and Retail Trade, all the industries had more than 91 percent of their new businesses start as small firms.

Distribution of New Businesses by Region and Major Industry

The distributions of new businesses by region and major industry is consistent for the period of study (see Table 4). Please note: due to confidentiality requirements, we cannot publish information at the county level in Table 4; also, the industries of Agriculture, Forestry, & Fishing and Public Administration are combined with Nonclassified data in Table 4.

Regionally, the Southwest and Southeast appeared to be the most developing areas with more than 20 percent of the new businesses each year. The Central region followed with about 18 percent of the new businesses. Industrially, Services is always dominant among new firms, with over one-third of all new businesses each year. Construction and Retail Trade were the second most frequently occurring industries with 20 percent and 18 percent, respectively.

Business Survival Situation

In the current study database, there are 3,802 firms with one year of experience in business, 2,184 firms with two years of experience and 569 firms with three years of experience. From these three groups, we can study business survival rates(6). Figure 3 shows statewide new business survival rates by years in business. Most new firms (63.7%) survived after one year in business, about half (52%) survived after two years in business, but only 43.4 percent of the new firms survived after three years in business.

Figure 4 illustrates the relationship between start-up business size and survival rate. It shows that larger firms had a much higher probability of surviving than smaller firms. Small firms are defined as those which had five or less initial employees; medium firms are those with six to 20 initial employees; and large firms are those with 21 or more initial employees. Firms of all sizes experience mortality over the years, but large firms always had much higher survival rates (83% for the first year and 66.7% for the third year) than the small or medium size firms (62.5% or 73.6% for the first year and 40.8% or 64.2% for the third year). In addition, medium and large firms are often more stable than small firms after two years in business; their second and third year survival rates are quite similar.

As discussed in the previous study, the same industry located in different regions could have significantly different survival rates because of the regional economic situation such as natural resources, transportation, competition level for the products or services(7), etc. Figure 5 is updated information of the survival rates after one year in business, by industry and region. It was based on the records of 3,631 new firms that started their businesses between the fourth quarter of 1992 and the first quarter of 1995 (the previous study was based on the records of 1,452 new firms). The more records this research is based on, the more confidence we can have in the study's results. Comparing the results of these two studies (for 1,452 and 3,631 firms, respectively), the distribution of survival rate may have changed slightly, but the pattern of each industry's survival rate in different regions stayed almost the same. Figure 5 shows that except for Public Administration, which has the same survival rate (100%) in all five regions, all industries had different survival rates associated with different regions. For example, the Mining industry had the best chance of survival (88.9%) in the Southeast, while businesses in Wholesale Trade had the best chance of survival (91.7%) if they were located in the Northeast.

Conclusions

Wyoming had an increasing number of new businesses each year from 1993 to 1995. The average annual growth rate was 3.9 percent. The Southwest and Southeast had the most development in the state, with more than 20 percent of the new businesses each year. The new firms created more than 4,300 employment opportunities each year for the state. More than half of those new jobs, however, were in Retail Trade and Services, which are generally low-paying industries. Construction provided the next highest number of job opportunities. The percentage of small businesses among total new firms became higher over the years, although large firms had a consistently higher survival rate than small firms over time.


Xiaohong (Sherry) Yu is a Senior Economist with Research & Planning. She specializes in Unemployment Insurance (UI) Trust Fund projections.


1 The original study, done in 1995, included only eight quarters of new business information (from the fourth quarter of 1992 to the third quarter of 1994).

2 Unemployment insurance registrations of new businesses are current, but Quarterly Unemployment Insurance (QUI) data has a time lag of one-half year. At the time that this research was done (November 1996), the most recent available QUI was the first quarter of 1996. As a result, the 1996 calendar year's new business information was not available for this study. Some employers register their new businesses first, then actually hire employees two or more quarters later; some of them never actually hire employees. This study does not consider firms without employees and payroll as active new firms. We have to match the above two databases in order to get the correct information.

3 The average annual growth rate is the result of the growth rate from the beginning level to the ending level divided by the number of years in between. For example, a little town had a population of 350, 430, and 500 from 1993 to 1995, sequentially. The average annual growth rate of its population from 1993 to 1995 would be {[(500-350)/350]/2}*100% which equals 21.4 percent.

4 The centered moving average is one of the statistical smoothing methods that attempts to reduce the effect of the random variation in a time series and to show the underlying trend or seasonal and cyclical components. For further technical information, please refer to: Statistics for Management and Economics, Mendenhall/Reinmuth/Beaver.

5 The new jobs discussed in this study do not necessarily mean that there is a net growth in the state or a specific industry since the existing firms may have decreased their employment simultaneously.

6 In this study, we define a firm as a survivor if it still reports its employment and payroll information in the same quarter that it started in a year or several years ago. The survival rate is the result of the total number of survivors divided by the total number of firms who started their businesses in the same quarter.

7 This research only considers the major industry category. There are ten major industries: Agriculture, Forestry, & Fishing (sometimes referred to as simply "Agriculture"); Mining; Construction; Manufacturing; Transportation, Communications, & Public Utilities--Electric, Gas, and Sanitary Services (sometimes abbreviated as "TCPU"); Wholesale Trade; Retail Trade; Finance, Insurance, & Real Estate (sometimes abbreviated as "FIRE"); Services; and Public Administration. In other words, we group firms at the one-digit level of the Standard Industrial Classification (SIC) system. If two firms are in the same major industry category, this does not necessarily mean they provide the same product or service. For example, both recreational service and business service are classified in the major industry of Services.


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