Michigan’s Massive Job Creation and Loss

Michigan’s economy is too quick for any state government to keep up with, as highlighted by the jobs data in the latest release from the Bureau of Labor Statistics. Despite the poor economic news coming out of the state in the past decade, Michigan is a job-creating dynamo. But it’s also a job-shedding one as well. The interplay between job creation and destruction, not the state’s headline-grabbing business favors, should guide policy.

There are always some businesses adding jobs and other businesses losing jobs in any given period. We can call them gross job gains and losses, with the difference between the two being net jobs gains and losses. So while GM’s decision to hire 2,000 workers in the metro Detroit area will raise net employment in Michigan (all else being equal), it is only a small piece of the state’s gross job creation.

Most news stories focus on the net job gains or losses because these are good indicators of whether an economy is improving or falling. There is a substantial lag to the release of gross job figures, however, making them less important to the day’s news. The monthly net job reports tend to show a state that is fairly stagnant — rarely adding or losing more than 2 percent of jobs in any year.

But the gross job creation and loss figures show the incredible amount of turnover in Michigan. In a given year, the state can add and lose 1 million jobs in gross, leaving no net gain. This means around one out of every four jobs is created and lost in the state every single year.

The latest release from the Bureau of Labor Statistics showed that there were 216,561 private-sector jobs created in the third quarter of 2010, a gain of 6.8 percent of total jobs, or an increase of one job for every 15 existing jobs. The state also lost 191,483 private-sector jobs, a loss of 6.0 percent of total jobs, or a loss of one job for every 17 existing jobs.

The BLS further breaks down the jobs data to jobs gained at new facilities and businesses, and new jobs at existing businesses and facilities. The latest release from the third quarter of 2010 showed 83 percent of the gains came from expansions. In any given period dating back to 1992, about three-quarters of new jobs in Michigan came from existing businesses expanding their operations.

Likewise, company contractions are the largest contributor to job loss in any given period. These also accounted for about three-quarters of the state's gross job losses.

The last two quarters showed the fewest job contractions in the series history that dates back to 1992. In fact, the state's job losses during the recession can largely be explained by the spike in contractions beginning in the fourth quarter of 2008 as compared to a smaller amount of job expansions as seen in the graphic below.

The large volume of gross job creation and loss, most of which come from expansions and contractions of existing businesses, has major policy implications. The state’s economic development programs are targeted at select industries and specific companies. The key areas of job growth and loss, however, are deep and broad and across industries. Incentive programs that look to assist with hundreds and sometimes thousands of jobs simply cannot keep pace with an economy that turns over hundreds of thousands of jobs every quarter.

A better approach is to fix the rules that guide all businesses. Gov. Rick Snyder’s latest tax plan would improve Michigan’s corporate taxes from 48th place among the states to 22nd, according to the Tax Foundation, and would be a structural improvement to the rules facing all businesses.

Likewise, the state’s regulatory environment could use reforming, since every business is required to be compliant in a myriad of administrative rules.

Michigan’s economy is showing signs of good news. The state’s return has little to do with the favors it has bestowed on businesses but on a broad-based economic recovery affecting thousands of businesses, and hundreds of thousands of independent decisions to expand or retract. To continue on this path, the state should reject selective incentives and focus exclusively on broad-based improvements.

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James M. Hohman is a fiscal policy analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.