Job creation and destruction by Bob Butcher, NIESR on 29-Jul-2013

Jobs are created when workplaces expand or new ones are established and are lost or destroyed when workplaces contract or close down. Before the recession, jobs were created at a rate of 4.0 million per year and were lost at a rate of 3.7 million, resulting in annual job creation of 300,000.

In a new paper published in the National Institute Economic Review, Bob Butcher and Matt Bursnall from the National Institute of Economic and Social Research (NIESR) and the department for Business Innovation and Skills (BIS) use workplace level data to look behind the headline employment figures at the total amount of job creation and destruction in the private sector. In particular, they show that net fall in employment after the recession was not the result of more people losing their jobs, but of lower job creation in new workplaces.

So, job churn far outweighs the net change - looking at just the net figures conceals this very high level of dynamism in the labour market. Even during the recession and subsequent period of extended economic stagnation overall, the UK private sector has been creating well over 3.5 million jobs a year.

The paper also shows that the net fall in private sector employment during the period 2008-11 was the result of reduced job creation through reduced workplace entry, primarily in small and medium-sized enterprises. This is in contrast to previous experience elsewhere when recessions usually lead to an increase in job destruction.

Figure 1

Each year after the recession shows a different picture. In 2008 there is a reduction in entry, in 2009 a sharp spike in job destruction, and in 2010 and 2011 continued reduced levels of entry, with 2011 showing especially low exit rates, leading to a net positive increase in job creation in that year.

Figure 2

The analysis in figures 1 and 2 is consistent with reduced investment in new workplaces as a result of lack of confidence and/or constrained credit especially for SMEs. The evidence does not, however, support the hypothesis of labour hoarding (which would lead to reduced levels of contraction in workplaces).

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