**1. Introduction**

Factors that impact the survival of a firm can be broadly categorized into firm-specific, industry-specific, and region-specific. Among region-specific factors, a significant factor is the local labor market environment. The local labor market's characteristics are likely to significantly impact the level of entrepreneurship and the success achieved by enterprises in that region.

Recent empirical research has identified the employment portfolio of a local market as a critical determinant influencing entrepreneurship in the region [1–4]. Borrowing from portfolio theory [5] in financial economics, the employment portfolio of the local labor market is now being used to evaluate the prospects of a business enterprise in that location. Portfolio theory helps identify the frontier whereat a combination of financial instruments will yield the optimal return, given their risk profile. Similarly, empirical investigation of the employment portfolio in a region has been shown to create a U-shaped frontier in the local labor market, given the risk–return profile in that market. The return in the labor market, on the horizontal axis, represents the growth in jobs, and the risk, on the vertical axis, represents the volatility in the growth in jobs in that local market.

The trade-off between employment-based risk and return measures in the local labor market is crucial for prospective entrepreneurs to estimate the likelihood of survival of their establishment in the future. Considering the interrelationship between risk and return in a local labor market, we hypothesize that this interrelationship, captured by the employment portfolio, can impact the survival of a new business operating in that region. We are interested in investigating whether the employment portfolio of a region influences the likelihood of survival of a new business in the next period. Is there any heterogeneity in the impact of employment portfolio on new business survival in metro and non-metro regions? How significant is this impact on new business survival in different regions?

Answers to these questions are likely to help design customized policies that promote and support existing and new business establishments in the region. This may also help local governments efficiently allocate financial resources for local economic growth rather than spending on blanket programs.

There is a gap in the existing literature highlighting the impact of local labor market dynamics on new business survival. This paper attempts to fill that gap. Notable investigations in this domain have focused on the role of human capital in the workforce [6], the impact of employment density on labor productivity [7], and the education level of the employer [8]. In turn, we measure the impact of changes in the local labor market environment on new business survival in three steps. First, we begin by identifying the existence of an optimal frontier, represented by risk and return trade-off in the local labor market (at county-level), by using the stochastic frontier estimation technique [1,4]. Second, we investigate the impacts of changes in the employment portfolios in the counties on the new business survival rate in 2010. These business establishments were born in 2005–2006. We find that the local employment-based measures significantly impact the survival of new businesses operating in metro counties. We then use income-based measures to validate our results and find that the latter also have a consistent and significant influence on new businesses, again on those operating in metro counties. Third, we narrow our sample to new businesses operating in Metropolitan Statistical Areas (MSAs) only, using both employment-based and income-based measures, testing the hypothesized relationship with new business survival rates in 2010. We also replicate the third step to investigate the impact on the new business survival rate in 2005. This carries dual benefits: one, it tests for the robustness of our initial findings, and second, it tests for any effects of exogenous shocks on the local labor market environment and their consequent impact on new business survival. The 2001 recession and the Great Recession are two major economic shocks that happened during the study period. By replicating the empirical exercise in different periods, we wish to isolate and study each exogenous event's impact on local labor market dynamics and subsequently on new business survival.

We find that volatility in the local labor market consistently impacts the likelihood of survival of new businesses in MSAs. We also find that this impact is stronger during recessions. Our results suggest that the continued survival of new businesses despite volatility in local labor markets contributes to local economic growth, and to the resilience of the local economy during economic downturns. We acknowledge the clear limitations of this research given the probability of reverse causality/endogeneity, and suggest trajectories for future work given these likely inter-relationships.

Our endeavor also addresses sustainability; in this case in the form of sustainable economic systems, identified through the viability and opportunities created by the local labor market. We find that over the long-term, the dynamics of local labor markets likely influence the behavior of employees, which further enhances the resilience of new businesses. This resilience displayed by new businesses, especially during recessions, promotes sustainable local economic development.

The following sections exhibit the details of this research endeavor. Section 2 reviews the new firm survival literature, the literature on the application of modern portfolio theory in regional economics, and how the application of this approach helps in identifying the impacts of changes in local labor markets on new business survival. Section 3 highlights the methodology and data used for the research. It presents the theoretical framework and the empirical model used in this attempt. The results of this exercise are discussed in Section 4. The final section concludes this paper, highlighting the impact of local labor market dynamics on new business survival, and discusses potential applications to policies aimed at local economic development.
