Illinois’ incredible, shrinking business establishments

From the first quarter of 2001 until the second quarter of 2015, business establishment growth has been 34 percent while jobs growth has been only 1 percent.

The number of business establishments – farms, factories, businesses, stores, etc. – has grown in Illinois in the last 15 years. Problem is, this “growth” isn’t yielding much in the way of new jobs.

However, for more than two years, a number of political commentators, union officials and media outlets have improperly analyzed Bureau of Labor Statistics, or BLS, data in an attempt to prove that Illinois has a strong economy. The BLS data set in question is BLS’ “Quarterly Census of Employment and Wages,” or QCEW. The QCEW measures the number of business establishments, the number of jobs, and the average weekly wage in each state.

The argument usually goes something like this: The BLS data show the number of business establishments in Illinois is growing, so Illinois’ economy must be doing well. The commentators who use this line – including former Gov. Pat Quinn and Illinois House of Representatives Speaker Mike Madigan – do not mention the jobs growth or the wage growth that is measured on the same survey, probably because Illinois’ weak labor market and poor wage growth would immediately disprove their claim that Illinois has a strong economy. So what’s behind the data?

The QCEW survey defines an establishment:

“An establishment is commonly understood as a single economic unit, such as a farm, a mine, a factory or a store that produces goods or services. An establishment is typically at one physical location and engaged in one, or predominantly one, type of economic activity for which a single industrial classification may apply.”

A firm or a company, on the other hand, can consist of one or more establishments.

The QCEW survey shows it’s true that the number of business establishments has been growing in Illinois, but the number of actual jobs per establishment has been shrinking dramatically. And in particular, when the economy was struggling during the Great Recession, the number of jobs per establishment fell especially quickly.

During this entire period of business-establishment growth, jobs growth has been almost nonexistent. From the first quarter of 2001 to the second quarter of 2015, establishment growth has been 34 percent, while jobs growth has been only 1 percent.

This shows that establishment growth can’t be used as a proxy for economic health without ensuring that other indicators, such as jobs and wage growth, are pointing in the same direction. In Illinois, establishment growth is not matched by jobs and wage growth.

For example, take the recovery period from the Great Recession, from the first quarter of 2010 to the second quarter of 2015. During this time, Illinois had the third-best establishment growth in the region, 10th-best jobs growth, and worst wage growth.

This doesn’t explain exactly why Illinois’ establishment growth is not matched by jobs and wage growth. But it does explain that a strong economy grows jobs and wages, not just business establishments.

The explanation for Illinois’ establishment growth could involve larger macroeconomic factors. It might also relate to the state’s weak economy. If larger establishments close or lay off workers, the unemployed might then become sole proprietors, creating smaller establishments. This might be reflected in the fact that the number of jobs per establishment has fallen so swiftly.

Those using establishment growth to argue that Illinois’ economy is growing should stop talking as if that data point somehow indicates Illinois’ overall economic health. It does not, especially when the jobs and wage numbers in the same survey are so poor. Illinoisans deserve straight talk about a state economy they know is not performing well, not cherry-picked data used for political purposes.