Wyoming Labor Force Trends
September 2024 | Volume 61, No. 9
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Entrepreneurship in Wyoming, Part 1
Using Administrative Data to Identify New Business Actualization
by: Matthew Halama, Senior Economist
This article is the beginning of a series of reports creating entrepreneurship metrics relying on administrative data rather than survey data for Wyoming. The first metric reported in this analysis is new business actualization, which is defined as the share of business applications that become employers in the calendar year.
In order to create the new business actualization metric, R&P used yearly new business application data compiled from the Wyoming Unemployment Insurance system (WYUI). The data then were cleaned to remove duplicates, non-liable businesses, and those that had Federal Employment Identification Numbers (FEINs) prior to the year observed, with remaining business applications being matched to the Quarterly Census of Employment (QCEW) database to see if these businesses were operational.
Introduction
Wyoming recently was identified as the state with the largest percentage of self-employed individuals in 2022 (Liu, 2024). The inspiration for recreating new business actualization metrics by year came from the Ewing Marion Kauffman Foundation, which produces a variety of entrepreneurial reports; one report in particular, titled "New Employer Business Indicators in the United States: National and State Trends" (2021), is the subject of this research report. In it, the Kauffman Foundation created four entrepreneur indicators and a summary index under the heading Kauffman New Employer Business Indicators. The four indicators are the rate of new employer business actualization, the rate of new employer businesses, new employer business velocity, and employer business newness. The index is called New Employer Business Actualization Speed.
Typically, the different entrepreneurship metrics are derived from national data such as the Business Formation Statistics and Business Dynamics Statistics from the U.S. Census Bureau. However, relying on survey data with regard to new business formation can lead to inaccurate results that create more questions than answers. One problem of using the data from the Census Bureau’s new business programs is definitional and the latitude of what is considered a business application. According to the U.S. Census Bureau (n.d.), business applications are defined as follows:
“The core business applications series that corresponds to a basic filtering of [employer information number, or EIN] applications. Includes all applications for an EIN, except for applications for tax liens, estates, trusts, certain financial filings, applications outside of the 50 states and DC or with no state-county geocodes, applications with a [North American Industry Classification System] NAICS sector code of 11 (agriculture, forestry, fishing and hunting) or 92 (public administration), and applications in certain industries (e.g. private households, and civic and social organizations)."
The basic filtering of FEIN applications could lead to too many business applications being considered as legitimate businesses operating in a geographic area. Economists from the Research & Planning (R&P) section of the Wyoming Department of Workforce Services have found little research using administrative data to examine different metrics regarding entrepreneurship in Wyoming.
The Wyoming Unemployment Insurance system (WYUI) underwent upgrades in 2018. The modernization effort allowed for “claimants to file unemployment insurance new and weekly claims online, protest and file appeals online, receive electronic correspondence, perform online eligibility reviews, make online payments against overpayments, and more. … with the tax system launch, employers will have the ability to file reports, authorize payments, file appeals, and make account changes online” (TATA Consultancy Services, 2019).
A recent article from Cowboy State Daily discussed how registered agents are utilized by non-resident owners of out-of-state businesses for privacy protection (Wolfson, 2024). These registered agents could have hundreds of businesses operating out of one address, which is an impossibility. The city of Sheridan, Wyoming, for example, has a population of 19,235, yet 16,000 corporations were registered in the city. These corporations have FEINs that would be counted as business applications even though it is unlikely that the business will actually do business or hire an employee in Wyoming.
This article is a beginning in establishing entrepreneurship metrics for the state of Wyoming. In order to accomplish this, entrepreneurship metrics from the Kauffman Foundation have been recreated using administrative data from WYUI. The first metric created that will be the subject of this research article is new business actualization, which is defined as the share of business applications that become employers in the calendar year.
This article has been divided into four parts: the introduction; the methodology used for this research and how the data were obtained; the results section detailing the numbers and percentages of the various steps leading to the final new business actualization number; and finally a conclusion with discussion of the results and future research possibilities.
Methodology
Data for this research came from the QCEW database and WYUI. The QCEW program publishes a quarterly count of employment and wages reported by employers covering more than 95% of U.S. jobs, available at the county, state, and national levels by industry (U.S. Bureau of Labor Statistics, n.d.). The QCEW database variables used were year and the FEIN.
Research & Planning’s role with WYUI is to assign each business application a North American Industry Classification System (NAICS) code. The NAICS code assigned is based on what the employee or employees are working on while employed in the state of Wyoming. In order to accomplish this task, R&P created a spreadsheet to document the date, name of the business, the FEIN, and the NAICS code that was assigned to the business. A sample of the NAICS coding structure is presented in Box 1. Each business is assigned a six-digit detailed industry code; for this research, NAICS codes were rounded up to the broader two-digit sector code. Utilizing the two-digit NAICS code, R&P is able to report general entrepreneurial activity taking place by industry.
For research purposes, R&P used Wyoming business applications that were deemed liable. A liable employer is one that has hired an employee and is paying UI taxes, while a non-liable employer is exempt from unemployment taxes.
The Kaufman Foundation has defined new business actualization as the share of business applications that become employers within two years of filing an application. One distinction to make is that the Kaufman Foundation uses business formation statistics data from the U.S. Census Bureau that include “Business Applications,” “Business Formations within Eight Quarters,” and “Average Duration from Business Application to Formation within Eight Quarters.” The calculation the Kaufman Foundation uses for new business actualization is business formations divided by business applications.
One difference is that R&P used the number of business formations divided by business applications within a calendar year. R&P also calculated the share of business applications that became employers within two calendar years of filing an application. The data available for this research are from 2020 to 2023, with business formations within two calendar years from 2020 to 2022.
To create the new business actualization metric, R&P used yearly new business application data compiled from WYUI. The data then were cleaned to remove duplicates, non-liable businesses, and those that had FEINs prior to the year observed, with remaining business applications being matched to the QCEW database to see if these businesses were operational.
Results
In 2020, there were 4,883 business applications submitted to the WYUI system. Of those 4,883 business applications, 247 were duplicates, 498 business applications had a FEIN that was in the QCEW database prior to 2020, and 305 business applications were considered non-liable employers leaving 3,833 business applications remaining (see Table 1). There were 2,295 business applications of the remaining 3,833 that were found in the QCEW database in 2020 giving a new business actualization of 59.9%. By 2021, the number of business applications from this group that were found in the QCEW increased to 2,554, a two-year new business actualization rate of 66.6%.
There were 5,804 business applications in 2021 submitted to the WYUI system. Of those applications, the following were excluded from this research: 183 duplicates, 588 business applications with a FEIN that was in the QCEW database prior to 2021, and 373 business applications considered non-liable employers. These exclusions left 4,660 remaining business applications. Of those remaining business applications, 2,628 were found in the QCEW database in 2021. The 2021 one-year new business actualization rate was 56.4% (2,628 divided by 4,660 = 56.4%). At the two-year level, there were 3,348 business applications in the QCEW database in 2022, with a two-year business actualization rate of 71.8% (3,348 divided by 4,660 = 71.8%).
In 2022, WYUI received 6,138 business applications. Excluded were 232 duplicate business applications, 492 business applications with a FEIN that was in the QCEW database prior to 2022, and 426 non-liable business applications, leaving 4,988 business applications remaining. Of those, 3,219 business applications were found in the QCEW database in 2022, for a one-year new business actualization rate of 64.5%. By 2023, 3,513 of those business applications were found in the QCEW database, with a two-year new business actualization rate of 70.4%.
In 2023, WYUI business applications totaled 6,063. Excluded were 329 were duplicate applications, 630 that had a FEIN that was in the QCEW database before 2023, and 390 that were categorized as non-liable businesses; this left 4,714 remaining business applications. Of those remaining applications, 2,765 were found in the QCEW database in 2023, for a one-year actualization rate of 58.7%. A two-year actualization rate cannot be calculated because 2024 data are not available.
From 2020 to 2023, the professional & business services sector was the largest originator of new businesses, ranging from a low of 685 in 2020 to 1,133 in 2022 (see Table 2). This is consistent with prior research from R&P, which noted that telework opportunities may be partially responsible for this large increase, particularly in professional & business services (Halama, 2024). Other industries with large numbers of new businesses included education & health services, from a low of 303 in 2021 to a high of 417 in 2022; trade, transportation, & utilities, with a low of 302 in 2020 and a high of 362 in 2022; and construction, with a low of 252 in 2021 to a high of 315 in 2023.
Discussion and Conclusion
From 2021 to 2023, new business actualization ranged from a low of 56.4% in 2021 to a high of 64.5% in 2022. In 2023, the largest number of new businesses were found in professional & business services (935), followed by education & health services (398). Trade, transportation, & utilities and construction each had 315 new business startups. From a research perspective, these data emphasize new entrepreneurship metrics highlighting the type of business by industry originating in Wyoming.
R&P has been electronically documenting WYUI business applications and assigning a NAICS code by year since 2020. In that time, business applications to WYUI have increased every year since 2020 before taking a slight dip in 2023. Removing business applications that were either duplicates, considered non-liable (no hired employees), or have an FEIN that was found in the QCEW database in a prior year, 92% of remaining business applications were new businesses. One-year actualization rates for new businesses ranged from 56.4% in 2021 to 64.5% in 2022.
These results differ widely from new business actualization percentages from the Kauffman Foundation. In its 2021 report titled, “New Employer Business Indicators in the United States: National and State Trends,” the Kauffman Foundation listed the rate of new employer business actualization for Wyoming at 6.81%. As described in the methodology, the variation is likely attributed to the basic filtering of business application EINs by the U.S. Census Bureau compared to actual business applications submitted to the WYUI system. U.S. Census Bureau projected business formations within four quarters varies slightly from business applications in WYUI that had FEINs showing up in the QCEW database.
Professional & business services (NAICS 54-56) was the NAICS code assigned to the most new businesses from 2020-2023, followed by health care & social assistance (NAICS 62) and trade, transportation, & utilities (NAICS 42, 44-45, 48-49, and 22). Future research could expand the NAICS code to six-digits rather than the two-digit level discussed in this article, to see which specific industries were growing. For example, in the professional & business services sector, Wyoming may see an influx of custom computer programmers (NAICS 541511) or administrative management consulting services (NAICS 541611), which could lead to additional research opportunities regarding telework if these consultants work for a company that doesn’t have offices in Wyoming. Another avenue to explore would be the creation of new business actualization percentages by industry. This could be done by grouping the WYUI business applications by two-digit NAICS and dividing by the two-digit NAICS industries that were established in that same timeframe. Adding this extra layer of research would show the ease or difficulty of new business actualization by industry in a given year.
The research presented in this article is the start of documenting and reporting new entrepreneurial metrics using administrative data from the WYUI system. The first metric discussed new business actualization and provided insights into the number of businesses by industry and year, with other metrics to follow in the coming months. The research is beneficial to the State of Wyoming, in particular the Wyoming Business Council, Wyoming Workforce Development Council, and future entrepreneurs as they are able access reports showing the type of industries by NAICS code that have set roots in Wyoming.
References
Ewing Marion Kauffman Foundation. (2022). 2021 New Employer Business Indicators in the United States: National and State Trends. Kauffman Indicators of Entrepreneurship Kansas City, MO. Retrieved August 21, 2024, from https://indicators.kauffman.org/wp-content/uploads/sites/2/2022/05/2021_New-Employer-Business-Indicators-in-the-United-States_report.pdf
Halama, M. (2024, February). Wyoming new business formation in 2021 and 2022. Wyoming Labor Force Trends, 61(2). Research & Planning, WY DWS. Retrieved August 21, 2024, from https://doe.state.wy.us/LMI/trends/0224/a1.htm
Liu, W. (2024). Wyoming leads the country in self-employment. Wyoming Administration & Information, Economic Analysis Division. Retrieved August 21, 2024, from http://eadiv.state.wy.us/SpecialReports/Emp_2022.pdf
Trounson, B. (2019, May 30). TCS modernizes and transforms Wyoming DWS’ Unemployment Insurance tax system. Tata Consultancy Services. Retrieved May 13, 2024, from https://www.tcs.com/who-we-are/newsroom/press-release/tcs-modernizes-transforms-wyoming-dws-unemployment-insurance-tax-system
U.S. Bureau of Labor Statistics. (n.d.). Quarterly Census of Employment and Wages. Retrieved May 20, 2024, from https://www.bls.gov/cew/home.htm
Wolfson, L. (2024, April 23). Evidence piles up showing Wyoming’s secretive LLC filing laws being used for fraud. Cowboy State Daily. Retrieved August 21, 2024, from https://cowboystatedaily.com/2024/04/23/evidence-piles-up-showing-wyomings-secretive-llc-filing-laws-being-used-for-fraud/
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