Over the past several years, Ohio’s employment has grown much more slowly than the national average. If we look at patterns of job creation and destruction in the state, we can start to get a handle on why. In the late 1990s, not only was the rate of job creation sluggish relative to the nation, but the rate of job destruction climbed rapidly.Employment - Ohio ; Economic conditions - Ohio

Brian Rudick

Yoonsoo Lee

English

Research Papers in Economics

This did not result from simply adding
2.0 percent more jobs every year; the
process was much more intricate. This
employment growth resulted from
adding 16.7 percent new jobs every year
while 14.7 percent of existing jobs were
destroyed.
■ Sluggish Job Creation 
Figure 2 shows job creation rates for
Ohio and the United States. To illustrate
how Ohio’s performance compares to
that of other states, we also plot the aver-
age job creation rate for the five states
with the highest employment growth and
the average job creation rate for the five
states with the lowest employment
growth over the sample period.
During the entire period from 1989 to
2001, Ohio recorded lower job creation
rates than the United States. While on
average 17 new jobs are created for
every 100 existing jobs in the U.S. 
economy every year, Ohio added about
15. Ohio’s job creation rate was small
enough to place it seventh-lowest 
among the 50 states and the District of
Columbia. In fact, Ohio’s job creation
rate was slightly lower over the sample
period than the average of the five 
April 1, 2006
Federal Reserve Bank of Cleveland
Employment Growth, Job Creation, 
and Job Destruction in Ohio
by Yoonsoo Lee and Brian Rudick
ISSN 0428-1276
Over the past several years, Ohio’s
employment has grown much more
slowly than the national average. If
we look at patterns of job creation
and destruction in the state, we can
start to get a handle on why. In the
late 1990s, not only was the rate of
job creation sluggish relative to the
nation, but the rate of job destruction
climbed rapidly. 
Employment growth is a key measure
of a region’s economic performance. In
Ohio lately, the news hasn’t been good.
Since the last business cycle peak in
March 2001, Ohio’s employment fell 
3 percent, while the nation added nearly
1.6 percent new jobs. Relative to other
states in the nation, Ohio fared none too
well, ranking forty-seventh in terms of
employment growth. Ohio’s lagging
employment growth hasn’t just been a
phenomenon of the recent business cycle
either. After tracking and trailing the
national average for different periods
throughout history, Ohio has trailed the
nation since the mid-1990s (see figure 1).
In fact, from 1995 to 2001, Ohio’s 
0.6 percent average annual employment
growth was well below the national 
average of 1.6 percent, placing it among
the five states with the lowest employ-
ment growth over this period.
Why is Ohio’s employment growth lag-
ging the nation and other states? Until
recently, it’s been hard to tell for sure.
Economists have relied mainly on
aggregated data to study differences in
net employment growth across regions.
While net employment changes are usu-
ally tracked as a major indicator of the
growth and decline of the economy,
these numbers mask the underlying
process of employment turnover. A
growing number of studies have ana-
lyzed data at the firm level and found
that job creation and destruction occur
simultaneously on a large scale at all
phases of the business cycle. In most of
the industrial sectors and geographical
regions that have been studied, it turns
out that gross job creation and destruc-
tion, or the total number of jobs created
and destroyed, is relatively large—far
greater than one would suspect by look-
ing at just the net change. Overall, this
line of economic research suggests that
if we want to understand the dynamic
underpinnings of regional employment
growth, it is important to study patterns
of job creation and destruction.
This Economic Commentary takes a pre-
liminary step toward understanding
employment dynamics in Ohio, focusing
on why Ohio’s employment growth has
struggled over the past 10 years. Using
recently available data from the Census
Bureau and the Small Business Adminis-
tration,1 we examine how the entry and
exit of firms in to and out of the econ-
omy, along with the growth of continu-
ing firms, contributed to employment
growth in Ohio from 1989 to 2001. We
investigate how the patterns of job cre-
ation and destruction differ across states
in order to identify any change in trends
that contributed to slower employment
growth in Ohio.
■ Job Creation and Destruction 
Economies are much more dynamic than
it seems at first glance. Every day the
U.S. economy adds thousands of jobs,
and every day thousands more are
destroyed. This turnover occurs as firms
respond to changing economic condi-
tions or technological improvements. 
Most new jobs—about two-thirds of
them—are created by existing firms, but
new firms represent an important source
of job creation as well. Similarly, firms
that downsize but remain in operation
account for the most jobs lost, but about
one-third of all jobs destroyed result
from firms closing. 
To illustrate the dynamics of employ-
ment growth, let’s look at an example. In
the 1990s, the United States averaged
net employment growth of 2.0 percent.slowest-growing states. This low job
creation rate significantly affects the
number of jobs Ohio adds each year. For
example, during the 1990s, there were
about 4.5 million jobs in Ohio. The
state’s 14.9 percent job creation rate
meant Ohio added 666,000 new jobs
each year. But if Ohio had created new
jobs at the same rate as the nation (16.7
percent), the state would have added an
additional 85,000 jobs per year.
Job creation rates are relatively low in
both manufacturing and nonmanufactur-
ing industries, suggesting that weak job
creation in Ohio is fairly broad based.
Some might find this result a bit unset-
tling because it suggests that our slow
employment growth cannot be attributed
solely to manufacturing decline.
But job creation rates alone do not
explain the decline in Ohio’s employ-
ment growth relative to the nation.
While job creation rates have fallen
since the mid-1990s in both Ohio and
the United States as a whole, Ohio’s job
creation rate has kept its position rela-
tive to the country and the five states
with the lowest employment growth.
■ Rising Job Destruction 
Figure 3 shows job destruction rates for
the United States, Ohio, and the aver-
ages for the same group of high- and
low-employment-growth states. Job loss
in Ohio as a percentage of total employ-
ment is much smaller compared to the
nation, and throughout most of the
1990s, Ohio had one of the lowest job
destruction rates of all the states. 
While lower job destruction rates are at
odds with the common perception that
Ohio has suffered a higher share of job
losses due to establishment contractions
and closings, a low job destruction rate
is not a phenomenon unique to Ohio. In
most Midwest states, job destruction
rates, as well as job creation rates, are
lower than the national average. This
pattern can be traced to industry compo-
sition and population growth. Both theo-
retical and empirical studies find that
older firms are less likely to shut down
but are also less likely to grow. Since
Midwestern states tend to have an older
industrial structure than the nation as a
whole, we are more likely to observe
lower rates of job creation and destruc-
tion here. Furthermore, relatively lower
population growth in these states may
lower the birth rate of new firms, lead-
ing to slower job creation rates.
FIGURE 3 JOB DESTRUCTION RATES
FIGURE 1 EMPLOYMENT GROWTH
–0.06
–0.04
–0.02
0
0.02
0.04
0.06
0.08
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
U.S.
Ohio
Bottom 5
Top 5
0.100
0.125
0.150
0.175
0.200
0.225
0.250
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Ohio
U.S.
Bottom 5
Top 5
FIGURE 2 JOB CREATION RATES
NOTE: The top five states include Colorado, Arizona, Idaho, Utah, and Nevada. The bottom five
states include Rhode Island, Connecticut, Maine, New York, and Hawaii.
SOURCE: U.S. Small Business Administration, Office of Advocacy, “Statistics of U.S. 
Businesses and Nonemployer Statistics,” <http://www.sba.gov/advo/research/data.html>,
accessed February 2006.
0.100
0.125
0.175
0.200
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Ohio
Top 5
Bottom 5
U.S.
0.150Once a typical Midwestern state with
lower rates of job destruction, Ohio has
reversed position. Ohio used to have a
lower job destruction rate than the aver-
age of the five lowest-employment-
growth states (figure 3), but in the mid-
90s, Ohio’s rate began to increase
relative to that average, surpassing it in
1996. Ohio’s job destruction rate also
increased compared to the nation; while
Ohio’s job destruction rate had been
significantly lower than that of the
United States, it began catching up in
the mid-90s and is now in line with the
U.S. average. 
Although declines in manufacturing
industries are partly responsible for this
phenomenon, they aren’t the whole
story. In fact, rising job destruction rates
weren’t specific to manufacturing. In
both manufacturing and nonmanufactur-
ing firms, job destruction rates moved
much closer to the national average. 
Contributing to the job destruction rate
are jobs that are destroyed because
firms go out of business and those that
are destroyed because firms reduce their
workforces. When we look at these two
sources of job losses separately, it
reveals another interesting pattern. In
general, closing establishments repre-
sent a relatively small share of total
employment. It is job losses at continu-
ing businesses that play a more impor-
tant role in aggregate employment
changes. In Ohio, job destruction at
continuing establishments makes up
about two-thirds of all job losses. And
while the increase in job destruction
rates is observed for both sources—
closing businesses as well as those that
are eliminating positions—the increase
at continuing establishments is much
more noticeable. In Ohio, job destruc-
tion at continuing establishments in
1989 was 8.5 percent, and by 2001 it
had risen to 12.9 percent. Although job
destruction rates at continuing estab-
lishments rose nationally over this
period as well, they rose faster in Ohio,
and since 2000, Ohio’s rate has
exceeded the nation’s. This finding sug-
gests that the subpar employment
growth in late 90s and early 2000s may
be traced to downsizing at continuing
establishments. 
■ Transition Period?
Examining changes in job creation and
destruction rates presents some intrigu-
ing findings on the dynamics of the
Ohio labor market. While Ohio’s job
creation and job destruction rates were
lower than the nation’s, its employment
performance was on par with the
nation’s until the early nineties. How-
ever, a rather dramatic increase in
Ohio’s job destruction rate relative to
the nation has driven employment
growth lower in the last decade. 
Should we worry about the increase in
the job destruction rate? While an
increase in the rate may imply a
decrease in job security for existing
workers, it does not necessarily suggest
that our economy has become less com-
petitive. As firms innovate and new mar-
kets grow, workers are reallocated to
jobs that better suit the needs of the
economy. This transition of the econ-
omy usually involves some destructive
and painful processes; workers are dis-
placed from old jobs, and less efficient
firms may be driven out of the market
by competition. Economists generally
think of this process of “creative
destruction” as a natural and necessary
step toward economic growth. In fact,
our data show that growing states in
general have not only higher rates of job
creation but also higher rates of job
destruction. This finding suggests that
slowly growing states are not falling
behind because they are losing more
existing jobs, but because their labor
market is stagnant; both job creation and
destruction are relatively low. While this
process of creative destruction creates
tough times for those who are displaced,
in the long run, our economy becomes
more competitive and better able to
meet society’s demands. 
The bigger concern for Ohio’s econ-
omy is the lack of job creation, rather
than the increase in job destruction.
Sluggish levels of job creation are
broadly observed in both manufactur-
ing and nonmanufacturing industries,
raising a concern that our economy is
not as vibrant as it needs to be to sus-
tain healthy growth. What is missing or
less evident in Ohio, compared to other
growing states, is this “creative” part of
creative destruction. Could the rise in
job destruction be a rosy sign that our
once stagnant economy is moving
toward a more dynamic steady state
with higher rates of job creation and
destruction? Although we may hear a
different story on the prospects of job
creation as more recent data become
available, there seems to be no clear
turning point in the trend of job cre-
ation just yet. For the long-run growth
of Ohio’s economy, job creation, both
from new firms and the expansion of
existing ones, is the key. To ensure the
future growth and success of the econ-
omy, we must employ innovative ways
to recycle our labor to new and more
productive jobs.
■ Footnotes
1. U.S. Small Business Administration,
Office of Advocacy, “Statistics of 
U.S. Businesses and Nonemployer 
Statistics,” <http://www.sba.gov/
advo/research/data.html>, accessed
February 2006.
Why Rates, Not Number of Jobs?
When making comparisons across states, it is helpful to examine job creation and destruction in terms of rates, rather than
the number of jobs. Rates can reveal which states have similar employment patterns, even though the size of the population
differs across states. The job creation rate is calculated as the total number of jobs created by new firms or added at existing
firms divided by the total employment of the state. Similarly, the job destruction rate for a state is calculated as the total
number of jobs that were destroyed by either closing or contracting firms divided by the total employment of a state. The net
employment change equals the job creation rate minus the job destruction rate.Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101
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material to the editor.
Yoonsoo Lee is an economist at the Federal
Reserve Bank of Cleveland, and Brian
Rudick is a research assistant at the Bank.
The views expressed here are those of the
authors and not necessarily those of the Fed-
eral Reserve Bank of Cleveland, the Board of 
Governors of the Federal Reserve System, or
its staff. 
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