© Copyright 2005 by the Wyoming Department of Employment, Research & Planning
New Firms, New Directions: Business Formation in Wyoming
by: Sherry Wen, Senior Economist
Compared to the prior two years, Wyoming’s new business formation slowed somewhat in 2002 and 2003, corresponding with the contraction of the national economy. Construction had the most new firms and was also the largest provider of initial jobs and wages.
New business formation is an important economic indicator. It not only represents the number of new businesses, but also economic growth and future jobs, wages, and tax revenues. The various formation rates across industries may also indicate the direction of labor market diversification. Research & Planning (R&P) has tracked new business formation and published related research every two years since 1993
Changes From Previous Studies
Years of collection now allow us to present the results at the county level. Also for the first time, industry results are available using the North American Industry Classification System (NAICS), which provides more detailed industry sectors.
A new business in this study is defined as one that is totally new and actively providing goods or services. In other words, a new branch of an existing firm does not count as a new business and neither does a firm reopening after closing for a while. By law, if an employer plans to start a new business in Wyoming and hire workers, it must register with the Department of Employment, Employment Tax Division (ETD) and indicate what kind of business activity it plans to conduct, the county or counties in which it will locate, and other related information. The ETD will then set up a new Unemployment Insurance (UI) account for the firm. The term firm in this study means a unique UI account.
R&P manages a monthly database based on registrations submitted by new employers. However, a business venture may not move forward as intended; many new firms are unable to open their business as originally planned. As a result, the new employer registry lacks information on the final number of new operating firms within a specific time period and the actual date that a new firm begins business.
To address these problems R&P matches the new UI registry to the Quarterly Census of Employment and Wages (QCEW), an administrative database that contains information from firms’ quarterly reports of employment and wages. If a new firm hires workers and reports wages in the QCEW, it is considered an active new firm in the corresponding quarter and is selected for our study database. We continue adding new firms in each quarter and obtain the longitudinal quarterly employment and wage information for each record as additional QCEW data becomes available.
Economic Impact of New Business Formation
In our study, we use three different ways to measure the impact of new business formation on the state economy: (1) the business formation rate - the number of new firms compared with the total number of firms in the state or a specific industry; (2) employment impact is the number of new jobs associated with the new businesses divided by the total annual average employment in the state or an industry; and (3) wage impact is the total wages associated with new business divided by the state’s annual total wages. All of the denominators are from the QCEW. Collectively, these three indicators tell us, within an industry, the percentage of total firms that new businesses account for and the proportion of total employment and wages associated with new firms.
Due to the complexity of business transfers (selling, merging, or splitting) and the availability of corresponding information in the QCEW, this research only considers the survival of a business under the original owner. If the original business owner sold the firm to another owner, we no longer consider the firm active, even if the successor continues conducting the same business activities. If the QCEW shows a firm still pays wages in the same quarter one year later, this firm is considered a one-year survival, and so on. The survival rate is the number of survivals divided by the number of new firms that registered with the ETD. One-year survivals looked at firms which registered from 1993 to 2002; two-year survivals included those who registered from 1993 to 2001; and three-year survivals analyzed firms registered from 1993 to 2000. The same method applies to any number of years of survival rate.
A total of 1,951 firms started business in Wyoming in 2002 and 1,932 in 2003 (-5.8% and -6.8%, respectively, compared to the 2001 level of 2,072). Although the number of new firms in these two years was still higher than most years since 1993 (see Figure 1), the new business formation rate dropped to a historical low (9.9%) due to the continued growth of the annual average number of total firms over the years (see Figure 2). One of the main reasons Wyoming had fewer new firms in 2002 and 2003 compared with 2001 was the economic contraction. In June 2003 the national economy experienced a nine-year high unemployment rate of 6.4 percent and the fifth consecutive month of no job growth (Strope, 2003). Meanwhile Wyoming’s UI claims and benefit payments reached a 10-year high (Wen, 2003b).
The new firms in 2002 generated 8,560 new jobs for the state (see Table 1), which accounted for 3.6 percent of state annual average jobs. These firms generated $137.5 million in wages, which was equal to 2.0 percent of state annual total wages in the year they opened. New firms in 2003 brought 7,946 new jobs (3.3% of the state total annual average) and $119.7 million in wages (1.7% of the state total).
The Southwest Region (see Map of Wyoming Regions) was the fastest developing region in terms of new business formation. It added a total of 496 new firms in 2002 and 494 in 2003, accounting for more than one-quarter of the state’s total new firms in both years (see Table 1). Those new firms created 2,319 new jobs (27.1% of the state total) in 2002 with $42.4 million (30.8%) in associated wages and 2,189 new jobs (27.5%) in 2003 with $49.0 million (40.9%) in wages.
The Southeast was the second-fastest developing region in 2002 and 2003 with 446 and 447 new firms, respectively. A total of 2,016 new jobs (23.6%) were added with $31.6 million (23.0%) in wages in 2002 and 1,828 new jobs (23.0%) with $19.3 million (16.2%) in wages in 2003.
Laramie, Natrona, and Teton counties attracted the most new firms. Laramie County’s 271 new firms in 2002 contributed 1,366 jobs and $18.5 million in wages. In 2003, Laramie County’s 276 new firms created 1,271 jobs and $14.6 million in wages. Natrona County added 219 new firms in 2002, which created 781 jobs and $9.7 million in wages. A total of 825 new jobs and $10.0 million in wages were added to Natrona County from 218 new firms in 2003. Teton County’s 208 new firms in 2002 created 981 jobs and $17.8 million in wages. In 2003, Teton County’s 187 new firms created 677 jobs and $22.7 million in wages. The associated wages per new jobs created by Teton County’s new firms are much higher than wages in either Natrona or Laramie counties. This may be due to the types of new businesses or the higher cost of living in Teton County relative to other Wyoming counties.
Construction attracted the most new firms in Wyoming (see Figure 3 and Table 2). There were 447 new Construction firms (22.9% of state total) in 2002 and 395 (20.4%) in 2003. The Construction industry also led other industries in associated new jobs and wages. In 2002, this industry provided 2,361 new jobs (27.6% of state total) and $43.1 million in wages (31.3%). The levels declined significantly in 2003, but new firms in the industry still added the most jobs and wages in the state (1,650 jobs and $27.0 million in wages). Professional & Technical Services had the second-largest number of new firms in Wyoming, 196 (10.0%) in 2002 and 209 (10.8%) in 2003. However, with only one to two employees per firm on average, Professional & Technical Services provided only 375 new jobs (4.4%) and $11.5 million in wages (8.3%) in 2002. In 2003, 344 jobs (4.3%) and $7.8 million in wages (6.5%) were created in the industry.
Accommodation & Food Services had the second-largest number of new jobs in both years (1,569 or 8.3% of the state total in 2002 and 1,191 new jobs or 15.0% in 2003), while Retail Trade ranked third (835 new jobs or 9.8% in 2002, and 883 new jobs or 11.1% in 2003). Wages in these two industries are typically low. As a result, the new firms in these two industries added just $4.7 million (3.9%) and $7.7 (6.4%) million in wages, respectively, in 2003. Although Health Care & Social Assistance ranked seventh in new firm formation, it ranked fourth as a new job provider and second as a wage contributor in 2003, with 705 jobs (8.9%) and $12.3 million (10.3%) in wages. The number of new Information firms declined during the past four years, but its associated new jobs and wages increased from 2002 to 2003. Information added 268 jobs in 2003 (up from 61 jobs in 2002) and $6.3 million in wages (up from $1.0 million in wages in 2002). Mining, a major contributor to the state’s economy, experienced a significant decline in new business formation from 2001. From 2001 to 2002, the number of new firms declined from 154 to 86 (a change of 44.2%), but in 2003 the number rose slightly to 91. The new firms in 2001 were associated primarily with a coal bed methane boom during that period.
Local business environments (e.g., demand for their services or products, number of competitors, city or town size) and natural resource availability (e.g., the location of large coal deposits in the Northeast Region or trona in the Southwest) are two of the major components affecting geographic industry distribution. The exact impact these or other factors have on new firm location is beyond the scope of this study, but they are nonetheless worth mentioning. For example, our data shows that most new Mining firms (63.8%) were located in the Northeast and Southwest regions (see Table 3). Thirty percent of new Construction firms began operations in the Southwest Region. More than one-half (52.6%) of the new firms in Professional & Technical Services originated in the Southeast and Southwest regions.
The impact of new business formation also varies widely across industries. For example, in 2002 Educational Services had a 23.1 percent formation rate and Utilities stood at only 5.6 percent (see Table 4). However, more than one-third of the major industries had double-digit new business formation rates in both 2002 and 2003. This may indicate greater industry diversification. Those industries, in the order of the 2003 formation rate, are: Management of Companies & Enterprises (27.0%); Educational Services (19.9%); Administrative & Waste Services (13.7%); Construction (12.4%); Transportation & Warehousing (12.2%); Professional & Technical Services (11.6%); and Mining (11.7%). New firms in Management of Companies & Enterprises had a 15.7 percent employment impact in 2003 (the largest among the industries) and a 50.3 percent wage impact (the strongest). The new firms in Educational Services ranked second with a 12.0 percent employment impact rate in 2003.
The survival rate in this study only looks at survival of a business under the original owner. A firm may be incorporated, sold, split, or merged with other firms and still conduct the same business activities, but due to complexity (i.e., information availability) of business transfers, it will not be considered a “survivor” in this study.
Statewide, more than two-thirds (68.0%) of the new firms survived one year in business. More than one-half (53.5%) survived two years, and 43.8 percent survived three years (see Table 5).
Survival rates vary across counties. For example, about 74.9 percent of the new firms in Washakie County survived one year in business, while only about 61.4 percent in Platte County survived. More than one-half (51.7%) of the new firms in Weston County, but just 38.8 percent of the new firms in Goshen County, remained in business three years. Of the three counties with the most new business formations in 2002 and 2003 (Laramie, Natrona, and Teton), Natrona County showed the best survival rates: 70.1 percent for one year, 55.3 percent for two years, and 44.5 percent for three years. Also, of those counties it was the only which had one-, two-, and three-year survival rates higher than the state average.
Survival rates also vary significantly across industries (see Figure 4). In the private sector, firms in Health Care & Social Assistance had the best survival rate after two years in business (71.5%), followed by Real Estate & Rental & Leasing (70.7%). The lowest two-year survival rates were in Utilities and Construction at 37.5 and 44.4 percent, respectively.
Summary and Discussion
Compared to the prior two years, Wyoming’s new business formation slowed somewhat in 2002 and 2003, corresponding with contraction of the national economy. Even though the annual number of new firms in 2002 and 2003 was still higher than in most years since 1993, the formation rate fell because of the continued growth in the number of firms.
The Southwest was the fastest developing region in the state. More than one-quarter of the state’s new firms began operating in this region in each of these two years. The Southeast Region was the second-fastest developing. Laramie, Natrona, and Teton counties generated the largest number of new firms.
Construction had the most new firms during 2002 and 2003, and was also the largest provider of new jobs and associated wages. However, while the number of new firms in Construction was high, they had the lowest survival rate. Professional & Technical Services had the second largest number of new firms in the state. However, this industry did not provide a significant number of jobs due to typically small business size. New business formation in the Mining industry slowed markedly compared with 2001, when coal bed methane was experiencing rapid development.
One industry’s new business formation could be a function of or associated with another industry’s formation. For example, the new business formation in Transportation & Warehousing may be directly related to new businesses in the Construction industry. The formation in Professional & Technical Services may also be associated with new firm development in Mining. Figure 3 shows a similar new business pattern over the years between those industries. Many new firms in Mining would have a large demand for geophysical surveying and mapping services, engineering services, etc. (which are included in Professional & Technical Services). As a result, this large demand would stimulate other new firms to engage in corresponding activities.
In addition to the demand for products or services, the level of new business formation in a specific industry may also depend on the required level of capital and human resources to set up a new business. For example, in Construction, especially in residential building, a worker such as a plumber or a carpenter who had obtained skills while working for another company for a few years could set up his/her own business easily without a large investment in office equipment or employees. In contrast, firms in industries like Manufacturing would require a larger supply of human and capital resources before starting a new business. They may need to build a new or buy an existing facility, purchase equipment, and hire employees before their business could actually open.
Strope, L. (2003, July 4). Jobless rate hits nine-year high. Casper star-tribune. Retrieved February 3, 2005, from http://www.casperstartribune.net/archives/
Wen, S. (2003a, January). Wyoming New Business Formation in 2000 and 2001. Wyoming labor force trends. Retrieved January 28, 2005, from http://doe.state.wy.us/lmi/0103/toc.htm
Wen, S. (2003b, September). Wyoming unemployment insurance claims and benefit payments reach 10-year high in fiscal year 2003. Wyoming labor force trends. Retrieved January 28, 2005, from http://doe.state.wy.us/lmi/0903/toc.htm
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