5.4 Employment turnover rates
Employment turnover rates (job creation and destruction) refer to the proportion of jobs in the economy that are created or destroyed each year. While employment turnover can be measured in different ways, the approach taken in the OECD firm-level project – and followed in this paper – was to look at employment turnover in entering and exiting firms: essentially, an employment-weighted measure of firm turnover. It should be noted that this is a slightly different approach to that taken by Carroll et al (2002) in their analysis of employment dynamics in the New Zealand labour market. Carroll et al (2002) looked at the total number of jobs created and destroyed across all firms in the economy, not just in entering and exiting firms.
5.4.1 Comparison with OECD project
Figure 4 shows the annual average employment turnover in entering and exiting firms (as a percentage of total employment) for New Zealand and other OECD countries from the OECD firm-level project. The New Zealand data are for the period 1995-2000, while the OECD data range across the period 1989-1994. Two figures are shown for New Zealand: one with zero-employee and one-year firms included, the other with zero-employee and one-year firms removed.
Figure 4 suggests that New Zealand has the second highest rate of employment turnover of the countries shown (Finland has the highest). However the inclusion or exclusion of zero-employee and one-year firms appears to make little difference to New Zealand’s employment turnover rates. While zero-employee firms should not have an impact on employment turnover (since by definition these firms have no employees), it is surprising that the removal of one-year firms does not appear to make much difference to employment turnover, given the large impact that removing one-year firms has on firm turnover. Further analysis is needed to explain this finding.
Sources: Statistics NZ and OECD/Bartelsman et al 2003
5.4.2 Comparison with Eurostat
Similar to the case with firm turnover rates, comparisons of employment turnover rates with the Eurostat data are not reported on here. Again, the reason for this is that the Eurostat data have been cleaned for false births and deaths, while the New Zealand data have not.
5.4.3 Summary and discussion
The above analysis suggests that New Zealand’s employment turnover rates are at the high end of the OECD range, although not the highest of the countries surveyed. Because the employment turnover measure used here is effectively an employment-weighted measure of firm turnover, it will in turn be driven by two factors: the first is the rate of firm turnover, while the second is the amount of employment in entering and exiting firms. As we have seen, firm turnover is high in New Zealand relative to the OECD, and the size of entering and exiting firms relative to incumbents in New Zealand is at or a bit above the middle of the OECD range. These two factors – high firm turnover rates, combined with moderately sized entering and exiting firms – combine to produce employment turnover rates that are at the high end of the OECD range, but not quite as high (relative to the OECD) as New Zealand’s firm turnover rates.
As discussed above, the measure of employment turnover used in this paper is different to that used by Carroll et al (2002), who looked at the total number of jobs created and destroyed across all firms in the economy, not just in entering and exiting firms. It is therefore not possible to tell from the analysis in this paper whether New Zealand’s aggregate job creation and destruction rates are higher or lower than in other countries, once measurement differences are taken into account. This could be a task for future research.
5.5 Firm survival rates
Firm survival rates refer to the proportion of firms in a birth cohort of new firms that remain in existence after a given period of time. A common finding in the cross-country literature is that the survival rates of new firms are quite low – typically, less than half of new firms remain in business by four or five years following entry.
Mills (2003) compared the survival rates of New Zealand firms with data from the OECD firm-level project, and found that New Zealand’s rates were at the middle to low end of the OECD range – although not the lowest of the countries surveyed. However, these comparisons could again have been affected by the inclusion of both zero-employee and one-year firms in the New Zealand data. This is because smaller firms tend to have lower survival rates (Brandt, 2004), and one-year firms by definition only survive for one year.
5.5.1 Comparison with OECD firm-level project
Figure 5 shows a comparison of New Zealand’s firm survival rates with those of other OECD countries from the OECD firm-level project. Survival rates are shown at two, four and seven years following birth (six years following birth for New Zealand). Again, two figures are shown for New Zealand: one with zero-employee and one-year firms included, and one with zero-employee firms and one-year firms removed. The survival rates for New Zealand at two and four years following birth are averaged across the 1995 to 1997 birth cohorts, but it should be noted that the survival rates at six years were calculated for the 1995 birth cohort only, due to data availability.
- Figure 5 – Firm survival rates at different lifetimes, NZ and OECD firm project data
- Sources: Statistics NZ and OECD/Bartelsman et al 2003
Figure 5 suggests that once zero-employee and one-year firms are removed from the data, New Zealand’s firm survival rates – at least at two years and four years following birth – are actually at the high end of the OECD spectrum. Average survival rates after two years are 77.4% (the highest of the countries shown), while after four years average survival rates are 48.1% (fourth highest of the countries shown).
Survival rates after six years remain relatively low, particularly when we take into account that survival rates for the other OECD countries are shown after seven rather than six years. In addition, removing zero-employee and one-year firms seems to make little difference to New Zealand’s six-year survival rates – actually reducing them slightly, from 34.7% to 34.2%. However, given that the six-year survival rates are based on only one birth cohort (1995), it is best to be cautious about inferring too much from this finding.
5.5.2 Comparison with Eurostat data
Survival rates could also have been analysed by comparing the rates for New Zealand (with zero-employee and one-year firms included) against those from the Eurostat data (Brandt, 2004). However, similarly to the case with firm and employment turnover rates, such a comparison would again have been difficult to interpret, because the Eurostat data have been cleaned for false births and deaths while the New Zealand data have not.
5.5.3 Summary and discussion
The above analysis suggests that New Zealand’s firm survival rates are broadly similar to survival rates in other OECD countries, and in fact may in fact be slightly higher than in some other countries once measurement differences are taken into account. Survival rates at six years following birth still appear relatively low, but this comparison was based on only one cohort of firms.
Survival is certainly difficult for new firms, with only about 50% of firms surviving as long as 4 years. However, there is nothing in the analysis reported here to suggest that new firms in New Zealand face particular issues in terms of firm survival (eg, a difficult business environment), relative to firms in other countries.
Similar to the case with firm turnover rates, an unresolved issue with regards to firm survival rates is the impact of “false” exit. As discussed above, it is currently not possible to distinguish “true” from “false” entry and exit in either the New Zealand data or the OECD firm project data. To the extent that rates of false exit may differ across countries, this could affect the comparability of survival rates. The completion of the LEED database should again help to resolve this issue.
