Employment Creation and Destruction:
An Analytical Review
by Randall W. Eberts and Edward B. Montgomery
Randall W. Eberts is the executive
director of the W.E. Upjohn Insti-
tute for Employment Research,
Kalamazoo, Michigan, and Edward
B. Montgomery is a professor of
economics at the University of
Maryland and a research associate
of the National Bureau of Economic
Research. The authors would like to
thank Bennett Harrison and
Jagadeesh Gokhale for helpful com-
ments, and Stephen Davis and
John Haltiwanger for useful discus-
sions and for sharing their data.
Introduction
Most assessments of labor market performance
over a business cycle or across regions focus
on changes in net employment rates. Hidden
behind the veil of these aggregate numbers are
four components of employment change: jobs
gained from business openings, jobs gained
from business expansions, jobs lost from busi-
ness contractions, and jobs lost from business
closings. In the last several years, a number of
studies have identified and examined these
components over time and across regions to
gain additional insights into the performance
and dynamics of labor markets.
Labor market dynamics are characterized by
two types of turnovers. One is the transition of
workers into and out of positions; the second is
the change in the number of jobs. While these
decisions are interrelated, they are aligned
with supply and demand responses. Workers
move between jobs to better match their skills,
wage expectations, and workplace preferences
with the attributes of the position. Businesses
change the number and type of employment
positions in response to shifts in product de-
mand and factor costs. Traditionally, research
on labor market dynamics has concentrated on
the supply-side responses to labor market shocks
by examining worker decisions to move into
and out of the labor force or between employ-
ment and unemployment. This paper focuses
on jobs by tracking employment changes re-
sulting from the opening, expansion, contrac-
tion, and closing of individual e