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The determinants of job creation and destruction: plant-level evidence for Eastern and Western Germany

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Abstract

We examine job creation and destruction in Eastern and Western Germany for the period of 2000 to 2006, using a comprehensive dataset that enables us to capture precisely gross job flows. Our analysis clearly states that pronounced differences between the two parts of Germany exist only in terms of the magnitude, but not in the composition of gross job gains and losses. This finding holds independently of the observed sector or size class of plants. Considering interaction effects between all variables, this first econometric analysis on gross job flows for Germany shows that job creation and destruction can be explained to a large part by plant characteristics. The pattern found in descriptive studies for other countries that job reallocation rates diminish with firm size is similarly true for Germany. The creation of jobs attenuates with plant age, while regional characteristics are only important for job destruction.

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Notes

  1. For theoretical models of the labour market focusing on job flows, see Blanchard and Diamond (1992) and Mortensen and Pissarides (1994).

  2. In the following we define a plant as the smallest economic unit where production takes place. In general, plant-level data should be preferred on both conceptual and measurement grounds (Davis and Haltiwanger 1999, 2716). Choosing plants instead of firms as the unit of observation has furthermore the advantage that the special features of Eastern Germany, where many West German firms established subsidiaries, can be better captured.

  3. Until 1999, the industry code WS73 was in use, which was then replaced by the NACE Rev.1 classification (this classification system conforms to the ISIC Rev.3 at the 2-digit level). Since we need data from the (preceding) year t − 1 to determine the sector and the region a closing plant belongs to in t, 2000 is the first year that can be used for our analysis.

  4. The reference to different time periods and sectors as well as to enterprises instead of plants renders direct comparisons almost impossible.

  5. Entries in Eastern Germany experienced a boom at the beginning of the 1990s. The existence of still relatively few firms as well as extensive public promotion instruments supported entrepreneurial activities. Hence, unlike in Western Germany, entries were very successful in terms of survival and longer-term employment growth (Brixy 1999; Brixy and Grotz 2004).

  6. The favourable conditions for start-ups in the early phase of reunification ceased to exist by the middle of the 1990s, and their survival as well as their growth started to lag behind their West German counterparts (see e.g. Schindele and Weyh 2009). Today, as Sternberg et al. (2007) note, the reasons for the higher firm formation rates can instead be found in poor labour-market prospects that promote necessity entrepreneurship.

  7. Table 6 in the appendix lists the corresponding sectors together with their employment shares in Eastern and in Western Germany.

  8. More than half of all employees in division 74 work in the three groups 741 (legal, accounting, book-keeping etc. activities), 747 (industrial cleaning) and 745 (labour recruitment and provision of personnel). Seven out of the eight groups show a positive net employment change between 2000 and 2006, with an exceptional net employment growth in group 745.

  9. As Baldwin et al. (1998) note, if primarily market structure or institutional differences are at work, then the two regions may exhibit different sectoral patterns. They find the same pattern as for the two parts of Germany for a comparison of the U.S. with Canada.

  10. See Table 8 in the appendix for the employment shares in the respective plant size classes.

  11. For the calculation of the interaction dummies we aggregate the plant-level information as follows: plants having between 20 and 49 employees are denoted as small, and those with 250 and more employees as large. Plants are referred to as young when they are up to 5 years old, otherwise they are old. We sum up the 48 sectors to manufacturing and to services, respectively. The nine region types are reduced to three core region types.

  12. In order to assess the influence of the construction sector, we ran the regressions without it, but the results hardly changed.

  13. For more information about different liability theses and some explanations see e.g. Aldrich and Auster (1986), Bruederl and Schuessler (1990), Baum and Mezias (1992), Barron et al. (1993) and Geroski et al. (2002).

  14. We adopted the growth rates of overall employment in the single cells in order to account for more general economic effects external to the plants. But regardless of the specification of the growth rates, they were always insignificant.

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Acknowledgments

We would like to thank Georg Hirte, Alfred Stiglbauer and two anonymous referees for helpful comments and suggestions.

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Authors and Affiliations

  1. Institute for Employment Research (IAB), IAB Regional Saxony-Anhalt/Thuringia, Frau-von-Selmnitz-Straße 6, 06110, Halle, Germany

    Michaela Fuchs

  2. Institute for Employment Research (IAB), IAB Regional Saxony, Paracelsusstr. 12, 09114, Chemnitz, Germany

    Antje Weyh

Authors
  1. Michaela Fuchs
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  2. Antje Weyh
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Correspondence to Michaela Fuchs.

Appendix

Appendix

See Tables 6, 7 and 8.

Table 6 Share of employees, job-creation rates and job-destruction rates in the 20 largest sectors in Germany (average from 2000 to 2006)
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Table 7 Plant migration between size classes (average from 2000 to 2006, in %)
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Table 8 Share of employees in the different size classes (average from 2000 to 2006, in %)
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Fuchs, M., Weyh, A. The determinants of job creation and destruction: plant-level evidence for Eastern and Western Germany. Empirica 37, 425–444 (2010). https://doi.org/10.1007/s10663-009-9121-8

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