An Update on New Business Formation in Wyoming
by: Sherry (Yu) Wen, Senior Economist

"Although Wyoming ranked third in 2000 and second in 1999 on the Small Business Survival Index¹ among all states and the District of Columbia, our data still show that less than half (43.0%) of the new firms statewide survived after three years in business. Each industry's firms had a very different probability of surviving in different regions."

B usiness formation and survival have been the subject of several previous articles in Wyoming Labor F orce Trends. The last study² was done in 1998 and covered new business formation statistics from 1993 to 1997. This update adds information from 1998 and 1999 to the historical time line and provides details on what has happened to new businesses during these two years.

New Business³ Formation - Statewide and Industry-wide

In 1998 and 1999, a total of 3,826 new firms (1,948 in 1998 and 1,878 in 1999) opened for business in Wyoming (see Figure 1 and Table 1). These new businesses brought 7,956 initial new jobs in 1998 and 8,341 in 1999 to the state economy.⁴ They also provided $96.9 million in wages in 1998 and $113.0 million in 1999.

If we define the new business formation rate as the number of new firms [new Unemployment Insurance (UI) accounts] divided by the number of employing units (existing UI accounts and all of their associated physical locations, i.e., chain stores),⁵ Wyoming experienced a 9.4 percent new business formation rate in 1998 and 9.1 percent in 1999 (see Table 1). In terms of impact on the statewide employment and wages, using 1999 as an example, 1,878 new firms provided 4.3 percent of the average employment (UI covered private sector) and 3.8 percent of the associated total wages in the fourth quarter.⁶ New firms represented a large volume of business activity but comparatively few jobs because the majority of these new firms started at a small operational size with five or fewer employees.

As reflected in Figure 1, the total wages contributed by new firms grew at a significantly faster pace, 20.7 percent annually during the past three years (1997 to 1999), than the total number of new firms and corresponding initial new jobs which only had 4.2 percent and 3.7 percent annual growth rates, respectively, during the same time period. The two steps of federal minimum wage adjustment ⁷ contributed somewhat to this rapid increase in new firms’ total payrolls, since new firms are likely to have a higher proportion of entry-level positions. A tight labor market for some types of workers may also result in higher wages. Importantly, there has been an increasing number of new firms in high paying industries⁸ such as Mining, Transportation, Communications, & Public Utilities (TCPU), and Manufacturing.

Figure 2 shows the history of new business formation by industry. Although Services, Construction, and Retail Trade traditionally gain the largest shares of new firms each year, Mining and TCPU had a constant increase in the number of new firms during 1997 to 1999. Manufacturing also experienced an increase until 1998, then decreased slightly in 1999. Mining almost doubled the number of its new firms in 1999 (90 new firms) compared with 1996 (only 53 new firms), contributing to a $17 million payroll increase. TCPU had a 27.3 percent increase in the number of new firms from 1996 to 1999. Meanwhile, new business formation in Retail Trade, the lowest paying industry, decreased by 16.0 percent. Additional research needs to be done to determine what factors influenced this decrease.

New Business Formation - Region and County

In 1999, the only region which had a higher new business formation rate than the statewide average (9.1%) was the Northeast Region, with a 9.4 percent formation rate (see Table 1). This may be due to higher oil and gas prices and coal bed methane activity. The Central Region had the same growth rate in new business formation as the state average. Examining new business formation rates by county, Teton (11.3%), Campbell (10.9%), and Natrona (9.5%) showed the fastest growth in 1999.

Regarding the total number of new firms, Natrona County led in 1999 with 262 new firms and 962 initial new jobs (see Table 1). Laramie County (the leader for the years 1994 to 1998),⁹ was second, with 217 new firms, and 994 new jobs. Teton County, as usual, ranked third with 197 new firms and 532 new jobs. Niobrara County, the smallest of the counties, added only three new firms and two initial new jobs. (See related article, “Employment Impact of New Businesses in 1999” for further analysis of new business formation by county.)

Figure 3 (available in PDF format only) shows the county distribution of the top ten shares of new firms, initial new jobs, and wages. Seven of these counties are on the interstate highways. This distribution suggests that besides population, natural resources, or tourism potential, transportation is a major concern for the new firms in choosing a location. Table 1 and Figure 3 also show that a larger number of new firms or new jobs does not necessarily indicate a proportional gain in wages or potential purchasing power due to differences in local industry composition. For example, Sweetwater County had only 92 new firms and 652 associated initial new jobs in 1999. However, its corresponding total wages were the highest in the state ($16.7 million), higher than the wages in any of the three counties that led in firm creation ($14.2 million for Natrona County, $11.9 million for Laramie County, and $10.4 million for Teton County). This is because more than one-third (37.4% or 244) of Sweetwater County’s initial new jobs were in oil and gas field services and natural gas liquids, both high paying industries. This analysis confirms that the impact of new business formation on local economies varies significantly by location.

Initial Firm Size and Business Survival

In 1998 and 1999, the majority (85.8%) of new firms in Wyoming were small sized businesses that employed only five or fewer employees during the first two quarters of their start up (see Table 2). This pattern in new business formation in Wyoming has occurred since 1993.¹⁰ Only 11.2 percent of new firms started with six to 20 employees, and 3.1 percent started with more than 20 employees. Only Retail Trade had a relatively higher percentage (29.0%) of businesses that opened with more than five employees. On the other hand, most new firms in Public Administration and Finance, Insurance, & Real Estate (FIRE) (100.0% and 95.6%, respectively) began with five or fewer employees. For all new firms, 5.1 percent began without permanent or full-time employment positions, choosing instead to employ only temporary employees.¹¹

Table 3 shows survival rates by industry and years in business. Regarding business survival rates, two issues need to be explained. First, this study only considered firms owned continuously by the same person or persons over the period of analysis. Firms that were bought or sold are not included in this analysis. ¹² Second, if after one year in business, a firm still reported employee wages on its Quarterly UI Summary Report, ¹³ it was counted as a one-year survivor. Similar definitions apply to subsequent years in the survival analysis. Over all, the survival rate decreases as the years in business increase. For example, more than two-thirds (66.6%) of the new firms survived after one year in business, over half (52.4%) of the firms with two years in business continued their operation, and less than one-third (28.7%) of firms with six years in business stayed open. The survival rates among industries are quite different. In the private sector, Agriculture and FIRE had the highest survival rates. Construction had the lowest survival rates.

Economic conditions and other factors impacting businesses vary regionally. As a result, business survival rates, even within the same industry, could also vary significantly between regions. The survival rate is one of the most important factors that new employers should take into account before deciding where to open their businesses. Since the first three years are usually considered the most critical time for a new business, Figure 4 provides three-year survival rates by industry and region. As shown, new firms in Agriculture had the highest survival rate in the Central Region (63.9%) and the lowest in the Northwest Region (43.6%). Mining firms survived most often in the Northwest and Northeast Regions (52.9% and 49.1%, respectively) and fared worst in the Southeast Region (only 37.5% survived). Manufacturing had the best survival rate in the Southwest Region (56.8%) and the worst in the Northwest Region (only 26.8%). New firms in TCPU and Wholesale Trade survived most often in the Northwest Region (52.7% and 53.4%, respectively). FIRE did well in the Northeast Region (61.8% survived). Some industries like Construction, Retail Trade, Services, and Public Administration showed no significant regional differences in their three-year survival rates.

Survival rates appeared to be strongly related to the operational size of firms (Figure 5 is available in PDF format only). This finding is consistent with our previous research. Generally, large firms had a better chance of survival than small firms. For example, most (81.7%) of those firms that hired 21 or more employees at start-up survived beyond their first year in business, and over half (53.6%) were still open three years later. In comparison, 66.4 percent of firms that began with five or fewer employees survived their first year and 42.6 percent survived beyond three years. Firms that only hired temporary employees during their opening quarters had the lowest survival rates (30.4% survived one year and 20.2% survived three years). The survivability of large firms might be explained by the greater variety of products or services they offer, lower unit costs, and their ability to keep good workers by providing better benefit packages and more opportunities for career advancement.

According to the Small Business Survival Committee,¹⁴ Wyoming ranks third on the Small Business Survival Index of 2000 (it ranked second in 1999). South Dakota and Nevada rank first and second, respectively. This index measures and ranks the 50 states and the District of Columbia based on 14 major government-related costs that impact small businesses and entrepreneurs such as taxes (e.g., personal or corporate income, capital gains, property, sales, unemployment insurance), workers’ compensation, and right-to-work. However, these government-related costs are not the only important factors. The local population and consumption capacity, the supply and demand relationship of a product or service, the number of competitors, transportation costs, and labor supply also critically affect small business survivability. The National Small Business United indicated in its 2000 survey results,¹⁵ that the top three challenges of growth and survival for small and mid-sized businesses are: 1) finding and retaining qualified workers, 2) state and federal regulations, and 3) economic uncertainty.

Our research on new business formation and survival is based on data provided by Wyoming UI covered employers, which is a primary source. Since we have not found any other state that has conducted this type of research, we cannot offer any practical data comparison among states on these issues.

Summary

A total of 3,826 new firms began operations in Wyoming during 1998 and 1999. These new firms created a total of 7,956 initial new jobs in 1998 and 8,341 in 1999. They also provided $96.9 million in wages in 1998 and $113.0 million in 1999. Services, Construction, and Retail Trade continued to add the largest number of new firms each year; however, Mining and TCPU (high paying industries) showed a constant increase in the number of new firms during 1997 to 1999. Although Wyoming ranked third in 2000 and second in 1999 on the Small Business Survival Index among all the states and the District of Columbia, our data still show that less than half (43.0%) of the new firms statewide survived after three years in business. Each industry’s firms had a very different probability of surviving in different regions. Large firms had a better chance to survive than small ones.

¹Raymond J. Keating, Small Business Survival Index 2000 - Ranking the Environment for Entrepreneurship Across the Nation, Small Business Survival Committee, September 2000, http://www.sbsc.org/SurvivalIndex_Action.asp?FormMode=Intro (September 20, 2000).

²Xiaohong (Sherry) Yu, "Update: New Business Formation in Wyoming," Wyoming Labor Force Trends, January 1999, pp. 1-9.

³New businesses or new firms in this study do not refer to new branches of existing firms or the successors of old firms based on ownership transfer. All new firms subject to Unemployment Insurance (UI) Law are required to file a new business UI registration form before opening. However, the number of new registrations is never equal to the number of new firms in a specific time period. Some employers postpone opening their businesses or decide not to open at all (our data show that 15.0% of new registrations never open for business). We generated the database for this study by matching the new registration files with the Quarterly Unemployment Insurance (QUI) database. [Note: Refer to Endnote 11 for a description of the QUI database.] Only those firms that actually reported paying wages to their employees (active new firms) were included in this study. From this database, we are also able to identify the actual business starting date for all new firms, which may or may not be the same as the liable date on the employer registration form.

⁴Initial new jobs (or new jobs) in this research reflect the initial employment level, which is the highest average quarterly employment during the first two quarters of opening. Since many firms opened in the second or third months of a specific quarter, using the quarter’s average employment (total quarterly employment divided by three months) cannot show their actual initial employment level.

⁵Wyoming Department of Employment, Research & Planning, Where Are The Jobs? What Do They Pay? 1998 Annual Covered Employment And Wages, December 1999, p. A-3.

⁶New business formation is a dynamic process occurring throughout the year. Many firms were not established prior to the fourth quarter. As a result, fourth quarter data provide a more complete picture for analysis.

⁷U.S. Department of Labor, Employment Standards Administration, Wage and Hour Division, November 8, 2000, http://www.dol.gov/dol/esa/public/minwage/q-a.htm (December 26, 2000). The federal minimum wage increased to $4.75 per hour effective October 1, 1996, and to $5.15 per hour effective September 1, 1997.

⁸Wyoming Department of Employment, Research & Planning, Where Are The Jobs? What Do They Pay? 1998 Annual Covered Employment And Wages, p. 21.

⁹Yu.

¹⁰Yu.

¹¹By law, Unemployment Insurance (UI) covered employers have to file quarterly UI summary reports. These reports include the employer’s employment and wage information for each quarter. The Quarterly Unemployment Insurance (QUI) database aggregates all of the employers’ information from this report. However, employers are only required to report the number of covered workers who worked during the week of the 12th day of the month. In other words, if employees only worked in other than the specified week, employers would report zero employment for that month. In this study, we define firms that reported wages but zero employment for the first two starting quarters as firms employing only temporary workers.

¹²Yu.

¹³See Endnote 11.

¹⁴Keating.

¹⁵Arthur Andersen and National Small Business United, Survey of Small and Mid-Sized Businesses Trends for 2000, n.d., http://nsbu.org/survey/results/ (September 20, 2000).

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