Employment update: the job creation meme II, the case of Texas

Note: this post was originally much longer, but WordPress failed me, and I do not wish to spend any more time on this.

Redux

In my last post, I discussed some preliminary reactions to one of the job creation memes that circulates in the popular press. In a nutshell, the contention is which groups or processes are responsible for generating jobs—businesses or consumers. Without developing a rigorous argument, I made three points. First, job creation statistics come from businesses reporting the number of employees they have on their payrolls. This point is important because not all workers are on a payroll (undocumented workers; sex workers; black market) and not all businesses accurately report payroll and employee data. So, we’re talking about a specific albeit large part of the economy—the formal, regulated parts, not necessarily cash-only businesses or grey/black market activities.

Second, businesses do not want to create jobs, for at least three reasons: hiring workers (tendering applications, interviewing applicants, training new personnel, etc.) is expensive (firing workers can also be expensive); it is not guaranteed to address its workload stresses; and, it may actually be based on faulty information about business prospects.

Third, ‘job creation’ is a sociological phenomena; we cannot observe ‘job creation’, but really only analyze statistics as they are reported to government agencies. These statistics are only part of the picture. There are qualitative aspects that reveal how job creation happens, such as which kinds of workers are hired (which may be structured by nepotism, cronyism, other forms of corruption, as well educational and skill levels; unionization may also be an important factor), or how businesses recruit and interview applicants (how much businesses spend on recruitment, how much workers spend to make themselves more attractive, through supplementary training, clothing, resume assistance, etc). The process of job creation itself creates costs and allocates those costs unevenly between workers and businesses depending on the characteristics of the company and industry. You could say that ‘job creation’ itself creates jobs, to the extent that human resource departments within companies and specialized recruitment agencies exist to facilitate the process.

Finer points

If you are going to report on job creation statistics, the least one can do is push further into the statistics and describe how the process is happening at lower levels of observation. On this note, there are several questions I would suggest are very important indicators of the nature and quality of job creation.

  • What kind of companies are creating jobs? Are they large/small; young/old; what is their ownership structure (publicly-listed, privately-held, S-corporation, partnership)?
  • What sectors of the economy are creating jobs (agriculture, business services, mining, manufacturing, retail, public sector, etc)? Under what occupational divisions can these jobs be classified (managerial, financial, engineering, legal, sales, administrative, healthcare, etc)?
  • How long do the jobs last? Are they seasonal? What is the rate of the turnover in the industry? If there is high turnover, is it the case that previously-fired employees are returning to old positions (like in manufacturing firms) or is there a regular churn of new employees (like in seasonal retail activities)? What are the job creation rates in high productivity, high value-added industries (such as business and financial services) as opposed to low productivity, low value-added industries? What role does job creation play in productivity and the cost structure of that industry?
  • How do job creation rates differ between similar scales of analysis, such as between major metropolitan areas or states? Within metropolitan areas or states, is there a difference in job creation between component areas (Manhattan versus Brooklyn; San Francisco versus Oakland; Los Angeles versus Orange; Dallas versus Fort Worth)?
  • How does the rate of job creation accord with demographic changes, such as the exit of retiring workers, the entry of new workers, in-migration, and the participation of women (who are more likely to leave the workforce for child-rearing, and possibly return for a variety of reasons)?

I think it is almost pointless to look at national-level job creation statistics for a country like the United States. The more interesting narratives come from specific case studies of industries at certain scales (metropolitan area, region, state). We know that the space-economy is characterized by clustering; the economy can be thought of as an amalgamation of production complexes linked together by networks of supply chains and business services firms. If you want to understand the prospects of a given area, then you must know how that area is inserted into the global economy, by way of its productive enterprises, business services firms, etc. I’m going to sketch out a map of job creation for the case of Texas, specifically its oil and gas sector, using job creation statistics from the Census to highlight the limits of that data. I also want to push past the tired cliche of “job creation” as driven by oligarchs or consumers by highlighting the larger geography in which all of these processes happen to look at the ramifications for workers and cities.

The case of oil and gas in Texas since 2009

I’m going to be as expeditious as possible and so I won’t be putting up comparisons of the oil and gas sector in Texas with other sectors. Suffice to state a few facts. First, total private-sector employment in Texas in the third quarter of 2013 was 9,292,884, of which 298,535 was in Mining, Quarrying, and Oil and Gas Extraction (NAICS 21). The sector is one of the smaller in the state, making up only 3.2 pct of private employment. (For the record, public employment in Texas is roughly 1.5 million). Within NAICS 21, there are three main sub-sectors: Oil and Gas Extraction; Mining (except Oil and Gas); and, Support Activities for Mining. We are mainly concerned with the former, which I focus on from now on.

Second, the Oil and Gas sub-sector employed 107,664 in 2013Q3, representing about 36 pct of the sector. In turn, in that year, companies established 11 years ago (the oldest firms) or longer accounted for 82.5 pct of employment in the sub-sector, however that figure has been declining since 2009Q3, when it was over 86 pct. The largest companies (more than 5oo employees) in this sub-sector employed 70 pct of all workers as of 2013Q3, which is almost two percentage points lower than their share in 2009Q3. That is, both younger and smaller companies must be growing at a faster rate than larger and older companies. It is noteworthy, however, that the oldest companies employ more workers in the sector than do the largest companies; in order words many older companies remain relatively small. Two pie charts below summarize the distribution of employees according to firm age and firm size in Texas as of 2013Q3.

image (1) image (2)

The main take-way from the difference in composition of the sub-sector in terms of age and size of its firms is that this is not an entrepreneurial sector. Start-ups, which are typically younger firms, do not constitute a large portion of employment. This should come as no surprise for this highly capital-intensive industry. Start-ups (young firms) are generally supposed to be the great job-creators, on average, in the economy as a whole. Just over 10 pct of employment is at very small firms (those with fewer than 20 employees), which is less than the average in the Texan economy. As a point of reference, for all firms in Texas, almost 15 pct of employment is contained within this size tier of firms. Similarly, almost 50 pct of employment is contained at very large firms across all firms in Texas. Within Texas at least, the oil and gas sector stands out for the greater than average proportion of employment that is organized within the very largest companies.

Let’s look at the distribution of oil and gas employment in Texas at the county level. Below is a choropleth map of sub-sector employment as of the third quarter of 2013.

oil-gas-tx-2013q3

There are perhaps five main production areas for oil and gas in Texas. The largest would be metropolitan Houston, in the south east, on the Gulf Coast. Harris County, where downtown Houston is, appears to contain almost half of the sub-sector. This tells us that quite a bit of the sector is in office work, because I doubt there is much drilling or refining in downtown Houston. The rest of the sub-sector is mainly located in and around Dallas (Exxon, for example, has its corporate headquarters in a Dallas suburb, though most of the managerial, planning, and oversight work of the company happens in Houston) as well as way up in North Texas (Amarillo), in West Texas (Odessa), and finally in South Texas (Corpus Christi, San Antonio). Most of all that is likely hydraulic fracking operations.

Astute readers will notice I still haven’t actually talked about job creation in oil and gas in Texas yet. One of my larger points is to emphasize the context of job creation. To do that, we should be aware of the basic organizational structure and geography of the industry under examination. However, as is clear from the above discussion, there are multiple indicators that could legitimately be used to describe job creation. I use ‘firm job gains,’ which counts the gains in employment (between beginning and end of a quarter) at firms that grew over the quarter, and ‘firm job lesses,’ which counts the losses in employment at firms that shrank over the quarter. So the former indicator does not include instances where firms fired employees or employees retired if that firm was growing. That is, employment losses at expanding companies are not counted by this indicator. The opposite situation holds for ‘firm job gains.’ The point of these indicators is to isolate job creation (that is, the formation of new permanent positions in firms, or the liquidation of previously permanent positions) as opposed to employee turnover or replacement hiring. These indicators are explained in brief at the Quarterly Workforce Indicator download site operated by the US Census Bureau (http://ledextract.ces.census.gov/).

The graph below depicts the quarterly net change in jobs in the sub-sector for Texas as a whole from 2009 to 2013. This is job creation less destruction. Bear in mind that these statistics represent flows, not a stock like employment.

image (4)

There are some key points. First, job creation is mostly greatest during the second quarter of the year. This makes sense as layoffs typically happen around Christmas and the New Year, and hiring begins in earnest in January. Second, the volume of job creation increased by roughly 80 pct between 2010 and 2011 (second quarters of each year), and about 20 pct between 2011 and 2012 (second quarters). It declined by over 10 pct from 2012 to 2013. It appears that job creation in the sub-sector has slowed, but remains quite high. The main point here is that the sector really did not begin to deliver gains to employment until after 2010.

The map above has suggested that we should look at job creation in the industry as it happens in specific areas. Houston appears to be the center of the industry, so we should start there. Below, I’ve compiled the job creation and job destruction statistics for oil and gas extraction in Houston (metropolitan statistical area) as a share of Texas job creation and destruction in that sub-sector.

image (3)

An important pattern that could be observed with job creation figures is whether or not convergence/divergence is taking place between areas. That is, it may be the case that rising diseconomies of scale at firms co-located in an agglomeration (such as oil and gas companies in Houston) or perhaps more general urbanization diseconomies (Houston itself) are causing firms to downsize operations or even relocate to other areas (say, to refinery areas in Beaumont or Port Arthur or to commercial areas in Dallas). The above graphic suggests that, for the first three years of the economic recovery beginning in the autumn of 2009, the oil and gas sub-sector in Houston captured a greater share of job destruction than job creation. This is not to say that there was net job destruction in Houston; in only two quarters did destruction of jobs surpass the creation of jobs within oil and gas. Rather, the point is that there was some convergence happening as areas outside Houston bore relatively less of the job destruction. In other words, roughly half the consolidation in oil and gas employment in Texas happened in Houston. This is notable because less than half the job creation happened in Houston during that period, and as roughly half the sector is located Houston, there is some discrepancy here.

More importantly, this process didn’t hold up for very long. If during the first three years that this sector was creating jobs (and I am sure we could assume was mainly related to fracking) most of this activity was happening outside of the industry’s central area, then once 2012 rolled around, job creation shifted back towards Houston.

Driving the process of convergence/divergence may be the evolution and maturation of the industry. The oil and gas sector can be divided into two main types of operations: upstream and downstream. The former involves discovery and extraction, and the latter involves transportation and marketing. It is intuitive that in the early stages of an economic boom in the oil and gas sector (fracking), upstream activities would expand first. As those projects are completed and go online, the emphasis shifts towards managing the projects, which ostensibly requires less although more specialized labor, and which can be accomplished off-site. As such, upstream activities probably require co-location with accountants, project managers, budget analysts, etc. There is a clear spatial division implied in the industry and in a boom.

Bottom line

A plausible explanation, then, of why job creation in the sub-sector shifted is the basic maturation of the industry. Placing job creation in its spatial context, then, has raised some critical points about distributional fairness but also, I suggest, about the durability of job creation. Here are some concluding points.

First, ‘job creation’ is much more than a conversation about the source of job creation, whether demand from consumers (demand from business, incidentally, is an ignored factor, even though such demand drives a lot of activity in trade and professional services) or from the benevolence of oligarchs. I think that conversations about job creation are impoverished and boring as they are currently. The more interesting aspects, I argue, are the industrial organizational and geographical aspects. From this angle, we can approach the quality and location of job creation, which implies distributional; matters.

Second, the data we have available on job creation do not allow us to answer those conversations about causes of job creation. They do, however, allow us to examine questions of distributional fairness. For example, the above statistics have pointed out that Houston is a crucial area for the reproduction of this industry. Yet, there is clearly a change in how Houston benefits, and I interpret the statistics as indicating that Houston has more recently distributed job destruction away. This is part of a larger story about the durability of the fracking boom and how this boom distributes benefits and costs. The data raise questions about job creation that are not part of the conversation, but which can be used to trace its potential trajectories in the future.

Third, I am not optimistic about its future trajectories, at least from the perspective of non-core areas. There is obviously a spatial component to the specialization of the industry, and as the industry matures, on-site operations will be streamlined. There is more here than simply demand for oil and gas. This is truly a matter of project management, budgeting, and contracts between oil majors and specialized providers. Fracking projects have a life span on average of about seven years, and are most profitable typically in the first two or three years. As the demand for labor on-site wanes and as companies begin to scale down or possibly enter bankruptcy, we might need to expect some financial turmoil in these peripheral areas. There could be consolidation. There could be stresses in the local financial networks, such as banks that finance commercial and industrial loans. There may be pressure on local spending and municipal tax revenues. Job creation may actually be a leading indicator of economic prospects.

A next step might be to perform a cluster analysis that identifies and isolates areas of fracking production (county or metropolitan scale) and then determines the extent to which job creation was shared between them. The timing of such changes would also be an interesting point. The cases of oil and gas specifically and Texas more generally deserve greater attention because Texas has captured so much of the employment growth since the nominal end of the recession and the fracking boom has been critical to its success. It’s development will have an impact on the US as a whole and certainly Gulf Coast area. We need to pay attention to this, examine the context of job creation, identify its locational attributes, and then we can speculate on the prospects of job creation. In this context, the source of job creation is only one aspect among many. The real questions cannot necessarily be answered by the data we have available, yet they do raise a number of other illuminating questions.

Nonetheless, left/progressive commentators should really cut it out with their thoughtless statements about job creation. Learn about which sectors are creating jobs, where they are creating them, and consider the context of those industries (namely production processes relations with other sectors, etc), and then maybe the conversation will take off.

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