Understanding Business Dynamics

AN INTEGRATED DATA SYSTEM FOR AMERICA’S FUTURE

Panel on Measuring Business Formation, Dynamics, and Performance

John Haltiwanger, Lisa M. Lynch, and Christopher Mackie, Editors

Committee on National Statistics

Division of Behavioral and Social Sciences and Education

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS

Washington, D.C.
www.nap.edu



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Understanding Business Dynamics: An Integrated Data System for America’s Future Understanding Business Dynamics AN INTEGRATED DATA SYSTEM FOR AMERICA’S FUTURE Panel on Measuring Business Formation, Dynamics, and Performance John Haltiwanger, Lisa M. Lynch, and Christopher Mackie, Editors Committee on National Statistics Division of Behavioral and Social Sciences and Education NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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Understanding Business Dynamics: An Integrated Data System for America’s Future THE NATIONAL ACADEMIES PRESS 500 Fifth Street, NW Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study is supported by a contract between the National Academy of Sciences and the Ewing Marion Kauffman Foundation (Grant # 20040649). The work of the Committee on National Statistics is provided by a consortium of federal agencies through a grant from the National Science Foundation (Number SBR-0112521). Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. Library of Congress Cataloging-in-Publication Data Understanding business dynamics : an integrated data system for America’s future / Panel on Measuring Business Formation, Dynamics, and Performance ; John Haltiwanger, Lisa M. Lynch, and Christopher Mackie, editors. p. cm. Index and bibliographical references. ISBN 978-0-309-10492-0 (pbk.) — ISBN 978-0-309-66930-6 (pdf) 1. Commercial statistics—United States. 2. United States—Statistical services. 3. United States—Commerce—Statistics. 4. Business enterprises—Statistics. I. Haltiwanger, John C. II. Lynch, Lisa M. III. Mackie, Christopher D. IV. National Research Council (U.S.). Panel on Measuring Business Formation, Dynamics, and Performance. HF3001.U53 2007 338.0072′7—dc22 2007005756 Additional copies of this report are available from The National Academies Press, 500 Fifth Street, NW, Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu Printed in the United States of America Copyright 2007 by the National Academy of Sciences. All rights reserved. Suggested citation: National Research Council. (2007). Understanding Business Dynamics: An Integrated Data System for America’s Future. Panel on Measuring Business Formation, Dynamics, and Performance. J. Haltiwanger, L.M. Lynch, and C. Mackie, eds. Committee on National Statistics, Division of Behavioral and Social Sciences and Education. Washington, DC: The National Academies Press.

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Understanding Business Dynamics: An Integrated Data System for America’s Future THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Understanding Business Dynamics: An Integrated Data System for America’s Future PANEL ON MEASURING BUSINESS FORMATION, DYNAMICS, AND PERFORMANCE JOHN HALTIWANGER (Cochair), Department of Economics, University of Maryland, College Park LISA M. LYNCH (Cochair), Fletcher School of Law and Diplomacy, Tufts University JOHN M. ABOWD, School of Industrial and Labor Relations, Cornell University PATRICIA M. ANDERSON, Department of Economics, Dartmouth College MATTHEW BARNES, Cabinet Office, United Kingdom STEVEN DAVIS, Department of Economics, University of Chicago TIMOTHY DUNNE, Federal Reserve Bank of Cleveland ROBERT M. GROVES, Survey Research Center, University of Michigan, Ann Arbor SUSAN HANSON, School of Geography, Clark University, Worcester, MA ROBERT H. McGUCKIN III (until March 2006), The Conference Board, New York PAUL D. REYNOLDS, Entrepreneurship Research Institute, Florida International University, Miami MARK J. ROBERTS, Department of Economics, Pennsylvania State University, University Park NIELS WESTERGARD-NIELSEN, School of Business, Aarhus University, Aarhus, Denmark KIRK WOLTER, National Opinion Research Center and Department of Statistics, University of Chicago CHRISTOPHER MACKIE, Study Director THOMAS J. PLEWES, Senior Program Officer MICHAEL SIRI, Senior Program Assistant CARYN KUEBLER, Research Associate

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Understanding Business Dynamics: An Integrated Data System for America’s Future COMMITTEE ON NATIONAL STATISTICS 2006-2007 WILLIAM F. EDDY (Chair), Department of Statistics, Carnegie Mellon University KATHARINE ABRAHAM, Department of Economics and Joint Program in Survey Methodology, University of Maryland, College Park ROBERT BELL, AT&T Research Laboratories, Florham Park, NJ WILLIAM DuMOUCHEL, Lincoln Technologies, Inc., Waltham, MA JOHN HALTIWANGER, Department of Economics, University of Maryland, College Park V. JOSEPH HOTZ, Department of Economics, University of California, Los Angeles KAREN KAFADAR, Department of Mathematical Sciences, University of Colorado at Denver and Health Sciences Center DOUGLAS MASSEY, Department of Sociology, Princeton University VIJAY NAIR, Department of Statistics and Department of Industrial and Operations Engineering, University of Michigan, Ann Arbor JOSEPH NEWHOUSE, Division of Health Policy Research and Education, Harvard University SAMUEL H. PRESTON, Department of Sociology, University of Pennsylvania KENNETH PREWITT, School of International and Public Affairs, Columbia University LOUISE RYAN, Department of Biostatistics, Harvard University NORA CATE SCHAEFFER, Department of Sociology, University of Wisconsin-Madison ALAN ZASLAVSKY, Department of Health Care Policy, Harvard Medical School CONSTANCE F. CITRO, Director

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Understanding Business Dynamics: An Integrated Data System for America’s Future Acknowledgments A long-standing goal of the Committee on National Statistics (CNSTAT) has been to improve the data and statistics that are crucial to accurate and timely economic measurement. In keeping with this history, the Panel on Measuring Business Formation, Dynamics, and Performance is pleased to present its final report. The successful conclusion of this project has resulted from the efforts of many individuals, including but not limited to the panel, whom we wish to thank. The project was funded primarily by the Ewing Marion Kauffman Foundation. Robert Litan, vice president of Research and Policy, and Robert Strom, director of Research and Policy, initiated the study and provided guidance from the Foundation. Both attended open sessions of meetings to offer their perspectives on the topic and to identify key questions of interest which, in the process, helped the panel sharpen its vision for the study. Many others generously gave of their time to present at meetings and to answer questions from panel members and staff, thereby helping us to develop a broader and deeper understanding of key issues relevant to the further development of business data systems. The panel especially thanks the statistical agencies; they provide financial support for the project and, even more importantly, allowed the panel access to key personnel with extensive expertise about various data programs. Presenters at the first meeting included Kathleen Utgoff and Jim Spletzer of the Bureau of Labor Statistics (BLS), Frederick Knickerbocker and Ron Jarmin of the Census Bureau, Steven Landefeld and Dennis Fixler of the Bureau of Economic Analysis, and Chad Moutray and Brian Headd of the Small Business Ad-

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Understanding Business Dynamics: An Integrated Data System for America’s Future ministration. Dan Newlon and Cheryl Eavey described the National Science Foundation’s (NSF’s) interests in the study, focusing much of their discussion on the importance of effective interagency data sharing. At subsequent meetings, the panel learned a great deal from presentations by Mark Mazur and Nick Greenia of the Internal Revenue Service about that agency’s data sharing history, policies, and prospects; Dan Covitz and John Wolken of the Federal Reserve on productivity measurement and the use of financial data on small businesses; Steven Kaplan (University of Chicago) and Josh Lerner (Harvard University) about data sources and research on financing of young and small businesses; Jack Triplett about special data problems for research on the service sectors; and Ron Jarmin, Rick Clayton, and James Spletzer about ongoing business list reconciliation projects at BLS and the Census Bureau. The panel benefited from the comments of Katherine Wallman, U.S. Office of Management and Budget, throughout. The panel also learned a great deal from presentations by Robert Fairlie (University of California, Santa Cruz) about data on the self-employed; Jay Stewart (BLS) on time use data for measuring employment and other business activities; and Martin David (Urban Institute) on data problems for measuring the activity of nonprofit organizations. Maurine Haver (Haver Analytics) and Bruce Phillips (National Federation of Independent Business) expertly presented on the needs of the business community for federally produced data on businesses. The panel also made an effort to hear about business data developments overseas. At our London meeting, we learned about the development and harmonization, as well as the quality and coverage, of business registers in the United Kingdom from John Perry, Office of National Statistics (ONS). We benefited from a report on the ONS Business Data Linking Project and data access programs from Prabhat Vaze (ONS); a description of user data experiences from Jonathan Haskel (ONS, Centre for Research into Business Activity and Queen Mary, University of London) and Brian Titley (senior economic adviser, director of Performance and Evaluation, Department of Trade and Industry); and commentary about business data systems and research in other European countries from Frederick Delmar, Center for Entrepreneurship and Business Creation, Stockholm School of Economics, and Søren Leth-Sørensen, Statistics Denmark. The panel could not have conducted its work without an excellent and well-managed staff. In that regard, we appreciate the support of Connie Citro, director of CNSTAT. Senior program officer Daniel Cork, research associate Caryn Kuebler, and senior program assistant Michael Siri provided excellent administrative, editorial, research, and logistical support. The panel also benefited from the work of Christine McShane, Eugenia Grohman, and Kirsten Sampson Snyder, of the Division of Behavioral and

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Understanding Business Dynamics: An Integrated Data System for America’s Future Social Sciences and Education Reports Office, who were responsible for editing the report and overseeing the review process. The entire panel owes a special debt of gratitude to Christopher Mackie, the panel’s study director. During the course of the panel’s deliberations, he played an invaluable role in facilitating communication among panel members, identifying studies, reports, and key informants that the panel could draw upon, directing the panel’s attention to gaps and inconsistencies in our earlier drafts of the report, and keeping us on schedule. Over the past year, he read and reworked each of the report’s chapters multiple times to ensure that the final product was technically accurate yet readable and relevant for a larger audience. All of us on the panel deeply appreciate and have greatly benefited from his knowledge, resourcefulness, organizational skills, and good humor. The report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the Report Review Committee of the National Research Council (NRC). The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We thank the following individuals for their participation in the review of this report: Nadin Ahmad, Statistics Directorate, Organisation for Economic Co-operation and Development; Howard E. Aldrich, Sociology Department, University of North Carolina, Chapel Hill; Richard J. Boden, Department of Finance, University of Toledo; Tim Davis, Statistics Directorate, Organisation for Economic Co-operation and Development; Will-iam ‘Denny’ Dennis, Jr., Research Program, National Federation of Independent Business Research Foundation, Washington, DC; Michael Gort, Department of Economics, University of Buffalo; Thomas J. Holmes, Department of Economics, University of Minnesota; V. Joseph Hotz, Department of Policy Studies, University of California, Los Angeles; and Christopher Sims, Department of Economics, Princeton University. Although the reviewers listed above provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations nor did they see the final draft of the report before its release. The review of this report was overseen by William Nordhaus, Department of Economics, Yale University, and Harold T. Shapiro, Woodrow Wilson School of Public and International Affairs, Princeton University. Appointed by the NRC, they were responsible for making certain that an independent examination of this report was carried out in

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Understanding Business Dynamics: An Integrated Data System for America’s Future accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring panel and the institution. Most importantly, we thank the members of the panel for their hard work. This report reflects the collective expertise and commitment of the individual members of the panel. All participated in the panel’s many meetings and in drafting material for discussion and, ultimately, for the report itself. Each member brought a critical perspective, and our meetings provided many opportunities for panel members to learn from one another. Finally the substance of this report and of much work on the topic of business data and statistics in general owes much to Robert McGuckin. Working both on the public- and private-sector sides, Bob contributed prominently to the development of business data. While chief of the Center for Economic Studies at the U.S. Bureau of the Census, he guided development of the Longitudinal Research Database and a broad research program in both statistics and economics. During his tenure, the Center for Economic Studies developed and sponsored research on U.S. business dynamics that has revolutionized the way economists think about and study the U.S. economy. Through his work, economists have learned that the U.S. business sector is incredibly dynamic with a high pace of entry and exit by businesses and an associated pace of job creation and job destruction. The studies he pioneered also showed that much of U.S. productivity growth is associated with this churning of businesses and jobs. He firmly believed that the quality of research based on business data produced by the statistical agencies would improve with greater interaction between outside researchers and businesses and the statistical agencies. As a result, he established the Census/NSF Research Data Center network that enables researchers to access proprietary firm-level data sets for approved research projects that provide new insights into the workings of the economy and the behavior of U.S. businesses. Bob was a member of the panel and participated in early meetings, but died March 12, 2006. We speak for the entire panel in acknowledging his important contributions to this report as well as to the insights from his work that are reflected in this report. We will sincerely miss him as a colleague and a friend. John Haltiwanger and Lisa M. Lynch, Cochairs Panel on Measuring Business Formation, Dynamics, and Performance

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Understanding Business Dynamics: An Integrated Data System for America’s Future Contents     Executive Summary   1 1   Introduction and Motivation   13      1.1  The Current System,   13      1.2  Study Scope,   15      1.3  Business Data Uses and Challenges,   17      1.4  The Value of Studying Business Dynamics,   19      1.5  Applications That Would Be Advanced by Further Development of Data on Young and Small Businesses,   21      1.6  The Panel’s Work,   23 2   What Is a Business?   28      2.1  Defining Business Units and Identifying Births and Deaths,   29      2.2  Defining Business Units for the Purpose of Measuring Dynamics,   35      2.3  Concept Versus Existing Data Collection,   42      2.4  Conclusions,   45 3   The Ideal Business Data System   47      3.1  Guiding Design Principles,   47      3.2  Defining and Tracking Businesses Over Time—The Business Register,   53      3.3  Ideal Data Collection Characteristics,   57

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Understanding Business Dynamics: An Integrated Data System for America’s Future 4   Limitations of the Current Data System for Measuring Business Dynamics   65      4.1  Data Coverage of Young and Small Businesses,   67      4.2  Gaps in Data on Business Dynamics and on Small, Young, and Nascent Firms,   77      4.3  Systemic Deficiencies,   79      4.4  Appendix: Data-Sharing History,   87 5   Improving Data and Statistics on Business Dynamics—Bridging the Gap Between the Current and a Comprehensive System   92      5.1  Expanding Data Sources for Measuring Business Dynamics,   94      5.2  More Effective Use of Existing Information,   100      5.3  Changing the Data-Sharing Environment to Realize Systemic Efficiency,   110      5.4  Recommendation Priorities and Costs,   113     References   117     Appendixes     A   Overview of Current Data Collections   123      A.1  Counting Firms and Cataloging Essential Characteristics—The Business Lists,   124      A.2  Tracking Businesses over Time: Business List-Based Sources of Longitudinal Microdata,   130      A.3  Data Sources Designed to Improve Coverage of Small and Young Businesses,   136      A.4  Employment Statistics,   139      A.5  Data on the Self-Employed, Entrepreneurs, and Business Gestation,   142      A.6  Data Coverage of Special Sectors: Agriculture, Nonprofits, and E-Commerce,   148      A.7  Financial Data,   152      References,   154      Table A-1  Business Data Sets,   158 B   Biographical Sketches of Panel Members and Staff   172     Index   179