Are Businesses Fleeing California? Myth-Busting Study Says No

Miniscule Job Loss Due to Businesses Leaving; Other Factors Have Far Greater Effect on Employment

SAN FRANCISCO, California, October 26, 2005 — New research is illuminating one of the state’s most fiercely-debated public policy questions: Are businesses fleeing high-cost California and taking employment opportunities with them? Contrary to widely touted opinion, businesses are not leaving en masse, and business relocation is not a major driver of job loss, according to a study released today by the Public Policy Institute of California (PPIC).

Using a new data source¹, the report analyzes comprehensive business statistics from 1992 to 2002. Looked at in the context of the state economy, the loss of businesses to other states is relatively insignificant. During two years of the highest departures – 1993 and 1994 – California experienced a net loss of 750 businesses or 0.05 percent of the state’s total establishments. At that rate, it would take 20 years for California to lose just 1 percent of its business establishments due to relocation out of state.

As for job loss, the study shows that even during years when out-of-state relocation cost California the most jobs – 1994 and 1997 – the loss was never greater than one-tenth of 1 percent of total jobs. At that rate, it would take a decade for California to lose 1 percent of its employment to relocation. Instead, nearly all the job loss resulted from establishments going out of business (71%) or downsizing their operations (27%).

But a lost job is a lost job, so why is this distinction important? “Businesses close down or scale back their operations for countless reasons,” says economist and PPIC senior fellow David Neumark, who co-authored the study with PPIC research fellow Junfu Zhang and PPIC research associate Brandon Wall. “The public policy implications and solutions may be very different for those dynamics than they are for businesses moving out to set up shop elsewhere.”

Indeed, policies that focus on preventing business relocation will have little effect on job growth, while those that promote new business formation and help existing businesses survive could be critical. Consider the numbers: Between 1996 and 1999, about 900,000 new jobs were created through the business expansion and contraction cycle, offset to some extent by a net job loss of about 300,000 from the cycle of businesses being created and businesses dying. This 600,000 net job gain was offset by a mere 19,000 jobs lost due to out-of-state relocation over the three-year period.

Just how small a role out-of-state relocation plays in employment change is also patently obvious when comparing the number of businesses that relocate within the state, as opposed to outside of it. Of the approximately 250,000 business relocations that originated in California between 1993 and 2002, 96 percent were moves from one part of California to another. In fact, 78 percent of moves occurred within one county and 35 percent within one city.

With rare exception, the public debate about business relocation in California has been based on anecdotes or on subjective surveys of employers – not on empirical evidence. The myth-busting findings of the study, Are Businesses Fleeing the State? Interstate Business Relocation and Employment Change in California, point to a need for broader and more-informed analysis. “This issue is too important to the state’s economic future to focus too narrowly or to risk focusing on the wrong thing altogether,” says Zhang.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office. The institute was established in 1994 with an endowment from William R. Hewlett.

up ¹.The National Establishment Time-Series (NETS), a longitudinal file on business establishments. This is the first dataset to permit a full breakdown of the sources of employment change.