The possibility remains that the recent economic weakness may prove more persistent than expected. …
– Federal Reserve Chairman Ben Bernanke, in testimony to Congress on Wednesday 

Never has the difference between changes in employment caused by temporary, cyclical economic forces and changes caused by more fundamental, structural economic forces been more perplexing or more important.

Our government has spent billions to bail out Wall Street (big banking) and Detroit (big auto). The official “recovery” is now two years old. And yet the unemployment rate is still more than 9 percent, and, even more troubling, more than 42 percent of the unemployed (more than 6 million people) have been unemployed for 27 weeks or longer.

What exactly is so different about the Great Recession of 2007-09 and its anemic recovery?

Two possible answers have been posed in studies released recently — slower job growth in startup businesses and slower growth in the “tradeable” sector.

E.J. Reedy and Robert E. Litan of the Kauffman Foundation present data from the Census Bureau and the Bureau of Labor Statistics showing that newly created businesses “are generating substantially fewer jobs than one would expect based on past experience.”

They don’t offer any definitive explanation, but clearly assert that the cause isn’t the Great Recession.

“The United States,” they say, “appears to be suffering from a long-term leak in job creation that pre-dates the recession and has the potential to persist for an unknown time.” This conclusion will certainly do nothing to relieve Federal Reserve Chairman Bernanke’s concern that economic weakness “may prove more persistent than expected.”

A second hypothesis concerning the unexpected persistence of economic weakness is posed by Nobel Prize-winning economist Michael Spence in his book, “The Next Convergence: The Future of Economic Growth in a Multispeed World.”

Employment growth in the U.S. over the two decades preceding the 2007-09 recession, Spence contends, was largely in the “nontradable” sectors of the economy — health care, construction, retail trade, tourism and government.

The products and services of these sectors must be consumed near where they are produced. They aren’t global products traded worldwide and thus not as highly subject to global competition as goods and services that are more heavily traded. I might quibble about the global nature of tourism, but overall his point is clear.

Job losses in manufacturing (stuff we used to make) have been offset by job gains in home construction and services (stuff we do).

Now that the housing bubble has burst and budgetary constraints are limiting health care and government job growth, all while high unemployment is limiting retail sales, the long-term decline of our manufacturing base is no longer masked by growth in the “nontradable” sector.

So, parsing these tales of gloom, is there any whiff of good news for Maine? Looking at business and job growth by firm size, the answer may be, “Perhaps.”

According to Department of Labor establishment wages records, Maine lost just over 1,100 businesses and just over 24,000 jobs between March 2007 and March 2009. That was a loss of 2.4 percent of our employers and 5.0 percent of our employees.

When those numbers are broken down by size of establishment, it becomes clear that the hit to smaller businesses was less severe than to larger businesses. For establishments with one to nine employees, the number of firms lost was 2.0 percent and the number of employees lost was 3.4 percent.

For both establishments and employees, the losses grew with size of firm. Employment in establishments with 10 to 49 employees fell 4.7 percent; for establishments in the 50 to 249 employee category, the drop was 5.6 percent; and for those in the 250-plus category, job loss was 6.4 percent.

Even recognizing that the smaller-size categories gained businesses that fell into the next smaller category over the period, the uniformity of the pattern is striking, especially in light of the fact that the same pattern holds true for numbers of employers and for both employers and employees in the manufacturing sector.

So the “good news perhaps” for Maine is that we seem to have a resilient small-business sector and if we can find ways to support and encourage its growth, we may just emerge with a more prosperous future. 

Note: In last week’s column, I mistakenly reported Cumberland’s population growth over the 2000 to 2010 period as 0.7 percent because I failed to subtract the population of Chebeague Island (which became an independent municipality between the two census counts) from Cumberland’s 2000 population total. Adjusting for this change, Cumberland’s 10-year population growth was 5.5 percent. Thanks to alert readers for noting this error. 

Charles Lawton is senior economist for Planning Decisions, a public policy research firm. He can be reached at:
clawton@maine.rr.com

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