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Copyright 1998 by the Wyoming Department of Employment, Research & Planning


Business Churning Dynamics:

Businesses Bought and Sold by Industry and County in Wyoming

by: Mike Evans
Tables by: Susie Christensen and Mike Evans

Constant churning occurs in the labor market, where businesses are bought and sold each day. Over a six-year period, 1991 to 1996, 16,422 businesses were bought and sold. This is almost as many businesses as Wyoming has. One is always hearing about large mergers and takeovers with mass layoffs, what about the ones that you do not hear about? Thousands of businesses are bought and sold each year, but what becomes of the workers and their wages in those establishments? What industries retain their workers? Does labor turnover occur after a business is bought, sold, merged, or taken over? Which industries have net increases in employment levels over time, and in which industries do businesses fail or survive after an ownership change? In this and in a future article, we will look at the dynamics of this constant ownership change as part of the everyday characteristics of the modern Wyoming economy and its consequences.

Business churning, bought and sold, or ownership change, is defined as businesses that were previously registered under a different Unemployment Insurance (UI) ownership or legal organization (also known as predecessor businesses), which changed to new owners (known as successors). Using the Quarterly UI administrative databases submitted by covered employers in Wyoming, the number of business turnovers were counted for 1991 through 1996 for each industry and county. In many circumstances, an initial business could have been bought and sold numerous times, accounting for a high total number of ownership changes. Also, the data presented in the tables are by number of units or establishments instead of actual number of firms.

Survival rates, turnover rates, employment and wage levels, compared with the normal overall industry levels, were tracked using cohort analysis of businesses from 1991 to 1996. The data sets were matched from quarter to quarter to track over time the differences from year to year. What impact does a change of ownership have on these variables? Or is the reverse true, does the wage level of an industry affect the number of ownership changes, survival rates and turnover rates of workers? Does the size and age of the firm matter on these variables?

Distribution By Industry

One observation of Wyoming's economy is the constant change in the Eating & Drinking industry. Now we can quantify this constant ownership change. The Services and Retail Trade industries had the largest number of ownership changes in 1996 (1,136 and 1,054, respectively), along with the highest relative share of units in each industry (19.2 and 27.5%), where relative share is defined as the number of units with ownership changes divided by the total number of units in that particular industry. This shows that Retail Trade has more churning than Services as a percentage of total units, relative share, rather than sheer number (see Table 1). The majority of ownership changes in the Retail Trade industry occur in Eating & Drinking establishments (40.7% of the total Retail Trade ownership changes and 12.4% of all ownership changes in 1996), Miscellaneous Retail Trade (22.2% of the total Retail Trade ownership changes), and Automotive Dealers & Service Stations (14.9%). The majority of changes in the Services industry occur in Hotels (16.7% of the total Services ownership changes), Health Services (14.5%), and Business Services (12.6%). Agriculture, Forestry, & Fishing and Manufacturing are numbers three and four looking at relative share for major industries with 19.1 percent and 19.0 percent compared to all ownership changes. The Construction industry fell into the middle of all major industry ownership changes but Special Trade Construction made up 7.5 percent of all ownership changes in 1996. Public Administration has the lowest number of ownership changes at 15, along with the lowest percentage (1.0%).

Employment is growing the fastest in the Services and Retail Trade industries in Wyoming along with the Agriculture, Forestry, & Fishing industry. Unfortunately, these industries have some of the lowest paying occupations and have the highest rate of business ownership changes. However, the Manufacturing industry is one of the slowest growing industries with traditionally higher paying occupations and has a low rate of ownership change. Mining, Transportation, Communications, & Public Utilities (TCPU), and Finance, Insurance, & Real Estate (FIRE) are also traditionally high paying industries and have low ownership changes of 15.9, 15.3, and 13.0 percent, respectively for 1996 (see Table 1). These high paying industries also have high capital requirements thus contributing to low ownership changes due to the cost of capital.

The number of business churning or ownership changes in each industry shows that Public Administration had the largest growth rate from 1991 to 1996 (650%), although there were only two ownership changes in 1991 and 15 in 1996. Public Administration usually only consists of a department or division switching from one department to another department. Looking at private ownership (excluding Public Administration ownership), the Agriculture, Forestry & Fishing, Services and Retail Trade industries had the largest growth rate in ownership changes (123.8, 89.7, and 76.3%, respectively) for the same time period. These ownership changes correspond with the industry analysis above with these same industries having the largest total number of ownership changes and relative share percentages, along with Mining having a low ownership change growth rate (25.5%).

Many people talk about the need for a vibrant economy and having the ability to understand and manage the economy. Traditionally, economic development is geared toward developing new businesses and jobs. However, there is a strong correlation with ownership changes compared to business births and deaths occurring in the economy especially the Services, Retail Trade, and Special Trade Construction industries (see April 1997 Trends, "A Study of Wyoming's New Business Formation"). These industries not only have the largest number of new business births and deaths but the highest rate of ownership turnover. Industries with high volatility data--like Services and Retail Trade--can help assess the fundamental health of the economy.

Distribution By County

Natrona and Laramie Counties have the largest number of ownership changes due to the sheer number of businesses compared with the rest of the counties. Although, Natrona and Laramie had lower churning rates (17 and 17.5% in 1996) of total number of businesses in the county or relative share by county than the state average churning rate (18.3%) of all businesses (see Table 2). Teton County has the highest percentage of ownership changes (22.5%), while Platte County has the lowest percentage (10.3%).

The number of ownership changes is not correlated with geographic location but by business activity, wage level, industry and employment size class make up of the county. Counties with a large proportion of Retail Trade and Services industries have higher percentages of turnover, while counties with high percentages of Public Administration and Mining businesses have lower percentages of turnover.

High rates of business churning indicate a growing or active economy and/or population, while low rates of turnover indicate a non-active, slow, or more moderately growing economy. This appears to contradict popular belief. Nevertheless, business churning data can help assess the fundamental health of the economy.

Survival

Of the original cohort firms in 1991 after an ownership change, 88.8 percent survived after the first year, 76.9 percent after the second year, 65.4 percent after the third year, 56.2 percent after the fourth year, 44.9 percent after the fifth year (see Figure). This appears to be a better survival rate compared with new business formations (see April 1997 Trends, "A Study of Wyoming's New Business Formation"), where new business survival rates were determined to be 63.7 percent after the first year, 52.0 percent after the second year, and 43.4 percent after the third year.

The average age of a business at the time of ownership change, or length of time in business, occurred at 5.5 years. While the first three years are the most important time frame for a business to survive after birth or opening, the first five to six years are the most important time frame for a business to survive after an ownership change.

Conclusion

In a future article, "Cohort Analysis", we will track a cohort of businesses over time to answer the remaining unanswered questions. We will examine employment and wage levels after an ownership change, along with worker turnover by industry and the influence that employment size class of businesses has on these variables. Business turnover can also be used to evaluate the success or failure of economic development. Traditionally, the major goal of economic development is to create and attract new businesses to an area, and to retain and expand existing businesses and industries.

Works Consulted

Lane, Julia I., Isaac, Alan G., and Stevens, David W., February 1996, "Firm Heterogeneity and Worker Turnover." Journal of Economic Literature.

Lichtenberg, Frank R., Siegel, Donald, June 1989, The Effect of Takeovers on the Employment and Wages of Central-Office and Other Personnel." Washington, DC: Bureau of the Census, Economic Planning and Coordination Division.

McGuckin, Robert H., Nguyen, Sang V., and Reznek, Arnold, The Impact of Ownership Change on Employment, Wages, and Labor Productivity in U.S. Manufacturing 1977-87. Washington, DC: Bureau of the Census, Economic Planning and Coordination Division.

Mike Evans is a Senior Economist, supervising Bureau of Labor Statistics (BLS) programs with Research & Planning.


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