*5.3. Role of Risk in New Business Survival in MSAs*

Risk is the key factor consistently influencing new business survival in MSAs, through both wage and salary employment and wage and salary income portfolios. The positive impact of volatility in the local labor market on new business survival is found to be stronger during recessions. As previously, we offer the following speculative scenarios to help explain these results.

The role of risk in the birth of enterprises is well documented [4]. Our results indicate that the risk displayed in the local labor market significantly increased the likelihood of new business survival. The increased turmoil in the labor market manifests through mass-layoffs, higher unemployment, stagnation in wage and salary income, etc. Empirical investigations highlight the fall in labor productivity, a secular decline in demand for semi-skilled workers, increases in low-wage and insecure jobs, and decreases in union membership as some of the long-term trends observed in the U.S. labor market [44]. Ref. [45] show that the growth rate in productivity picked up in the mid-1990s, slowed in the mid-2000s, and remained flat going into the Great Recession. The response of a rational worker aware of both the impact of exogenous macroeconomic shock and the ongoing dynamic changes in the local labor market would be to continue with their existing employment. This decision results in a lower employee turnover and a higher retention rate for newly established businesses.

A low employee turnover rate is beneficial for establishments. Excessive employee turnover has both monetary and non-monetary costs that can have a significant and farreaching effect on the economic and operational efficiency of the establishment. In extreme cases, high employee turnover may have detrimental impacts on new business survival. Ref. [46], citing a nationwide survey, found that the average internal cost-per-hire for an engineer was USD 4901, a computer programmer USD 2500, a secretary USD 1000, and a retail sales associate USD 350 in the 1990s. The direct monetary costs can be attributed to the costs of advertising, recruitment, candidate travel, selection, hiring, assignment, orientation, training, signing bonus, and relocation expenses for the new employee(s). These costs would be significantly higher in current dollars. The non-monetary costs include the breakdown of customer relations, the disruption of workflow, declines in morale of the remaining employees, and additional costs incurred till the newly hired employee acquires necessary job skills and can work at the desired level of efficiency [46].

Highly talented and competent employees generally leave for better opportunities or get poached by competitors. The monetary and non-monetary costs from the loss of such employees are likely to have a substantial impact on the survival of new establishments. "County/MSA Employment growth, 2000–2007" was found to have a negative impact on new business survival rate in 2010 during the 2000–2009 and 2000–2008 timeframes. The sign of this variable indicates an inverse relationship with new business survival rate, which reinforces the impact of high employee turnover on the survival of new businesses. Broadly, new businesses operating in MSAs that witnessed high employment growth are also likely to experience high employee turnover, which would result in significant monetary and non-monetary costs. The aggregate consequences of these costs for new businesses, operating on shoe-string budgets, could be attributed to the closure of some of these businesses. The shift in employee preference to current employment vis-a-vis the potential gains derived from a risky switch during a recession helps a new establishment save significant economic resources. Additionally, the prolonged employment of such employees during a recession facilitates a continued focus on innovation, and on maximizing efficiency, which are the comparative advantages of a new business and are the bedrock of their survival.

An interesting result found in the empirical exercise is that risk only consistently manifested on survival rate via wage and salary employment in 2005, and via wage and salary income in 2010. Our analysis of new business survival also highlights the role of the salient structural changes observed in the labor market over the years, the impact of which became strongly visible during both recessions. The labor market witnessed a significant export of jobs to low-wage countries, beginning with manufacturing jobs going to China and Vietnam, and subsequently low-end service sector jobs going to India and the Philippines. The former was facilitated through increased global trade, and the latter accelerated through the technological improvements adopted by corporations in the late 1990s and early 2000s. Ref. [47] found that increased Chinese imports resulted in reductions in both employment and wage levels in the manufacturing sector. They also found that increased transfer payments made through multiple federal and state programs masked the loss in average earnings of the affected households during this period. Ref. [48] showed that globalization affected wages by pushing workers out of the manufacturing sector into low-paying jobs elsewhere. These subtle structural changes over the prolonged period changed the composition and quantity of jobs available in the key sectors, which first became evident during the 2001 recession. The Great Recession resulted in a sharp increase in unemployment across all sectors of the economy, thereby strongly demonstrating the impact of the structural changes that had begun earlier in the 1980s and 1990s. Workers across all sectors experienced a significant and prolonged decline in or loss of wage and salary income, which manifested through income-based measures in our investigation.

As noted above, the 2001 recession significantly impacted the technology and tourism sectors. Regions that specialized in these two sectors were most affected by this recession. States in the Mideast Census Region were least affected by the 2001 recession [49].

The Great Recession originated in the housing sector in urban centers, then transmitted to the financial sector, and eventually engulfed the national economy, before spreading to other countries. The origin of this economic shock and its transmission created an initial perception that its impact would create severe economic challenges in large cities and urban centers. However, investigations into the responses of regional economies to the Great Recession have shown that the impact has been more severe, and the recovery has been slower in smaller towns and rural areas.

Empirical research has shown that urban areas performed better during the 2001 and 2007–2009 recessions [49–51]. Not only were MSAs more able to endure these recessions, but they were also able to recover faster than non-MSAs. Surviving businesses contribute valuable tax dollars, and at the same time help reduce the additional expenditure of state and local governments in the form of transfer payments, such as unemployment benefits. These contributions significantly enhance the resilience of the community, especially during economic downturns. New businesses that were able to survive during these recessions sustained the local economy during them and accelerated economic growth in the recovery phase.
