Study: New businesses in Maine survived recession at rates higher than national average

By Whit Richardson, BDN Staff
Posted Aug. 29, 2013, at 12:15 p.m.

AUGUSTA, Maine — Despite the challenges of the Great Recession, Maine businesses launched in 2008 survived the next five years at a rate better than the national average, according to a new study from the Maine Department of Labor.

In 2008, entrepreneurs launched 2,360 new businesses in Maine, according to the study. Ruth Pease, an economic research analyst at the labor department’s Center for Workforce Research and Information, and the author of the study, then tracked those businesses using annual employment data through the next five years, including how many closed, how many people they employed, and the average wages they paid.

In the past, CWRI has tracked new business starts in individual years, but tracking those businesses through subsequent years is a first, Pease said.

“In the first year, new businesses tend to add a lot of jobs and continue to improve their sector in terms of payroll and hiring in the first year,” Pease told the Bangor Daily News by phone Tuesday. “But this is the first year we’ve looked at subsequent years to see if their impact is sustained over time and see what happens to those businesses.”

What happened, Pease said, was surprising.

By 2012, 1,314 of those businesses that launched in 2008 were still in operation — a survival rate of 56 percent, according to the study.

A 56-percent survival rate compares favorably to national statistics. Roughly half of all new establishments in the United States survive to their five-year anniversary, according to the U.S. Small Business Administration.

“So even during this very difficult period we saw that after five years we got 56 percent survival of those new businesses. That seems to me to be pretty encouraging,” Pease said.

Interestingly, while the number of businesses dropped by 44 percent, the total number of people employed by the businesses in the 2008 cohort only fell by 3.7 percent, from an average number of employees of 7,167 in 2009 to 6,901 in 2012. This suggests that while businesses closed, the ones that survived continued to grow.

Total payroll paid by new businesses increased by 6 percent between 2009 and 2012, from $195 million to $205.9 million, with more than half of the increase occurring between 2011 and 2012, according to the study.

Pease warns against using the study’s findings to draw any conclusions about larger trends.

“This is a unique project. We really were focused on a specifically defined group and then working intensively with the records to make sure we were catching all the connections between businesses and so forth,” she said. “In that respect, this study isn’t comparable to anything else I’ve seen out there.”

The study also examined in more depth how businesses in the following six sectors fared during the five-year period: accommodation and food services; administrative and waste services; health and social services; professional and technical services; retail trade; and wholesale trade.

Pease chose these sectors for more study because each represented around 10 percent of the new business starts in 2008. She only gave a cursory glance to other sectors, such as manufacturing, which did not have as big an impact on employment.

Within specific industries, the sectors with the highest rates of survival between 2008 and 2012 were retail trade and health and social services, which had survival rates of 68 percent and 65 percent, respectively.

Sectors with the lowest survival rates were administrative and waste services (50 percent), professional and technical services (51 percent), and wholesale trade (51 percent).

Among the key sectors, job growth between 2009 and 2012 ranged from a 23 percent decline in administrative and waste services (816 total jobs to 628) to a 7 percent gain in health and social services (718 total jobs to 765). Overall, the most jobs were provided by the new businesses in the retail trade industry, which employed 1,629 people in 2012, a 2 percent increase from 1,591 employed in 2009.

Another interesting aspect to the study is the difference between the survival rates of new business starts in metropolitan areas versus rural areas.

In 2008, 45 percent of new businesses were located in Maine’s three Metropolitan Service Areas, or MSAs: Portland-South Portland-Biddeford, Bangor and Lewiston-Auburn. In 2009, jobs were evenly distributed between businesses in MSAs and those outside the MSAs.

However, the survival rate of businesses in MSAs between 2008 and 2012 was 58 percent, while those in the rest of the state was 54 percent. Businesses in the MSAs also grew their share of employment, from 50 percent in 2009 to 53 percent in 2012.

While geographic diversity of new business starts isn’t something that’s been well studied in Maine, Pease wasn’t surprised by the data.

“I think it reflects a long-term concentration of commerce and employment in the metropolitan areas, and that’s been going on for a long time,” she said. “I think it’s a fairly dramatic illustration of that.”

Pease said her “gut feeling” is that the seasonality of rural businesses has a lot to do with the lower survival rate of those businesses.

“We need to take a longer look at that, but just the fact that businesses have to contend with the boom and bust times across the seasons makes it a bit more difficult to do business in general,” Pease said.

The study wasn’t completed for any particular state agency or in response to any specific request by lawmakers, and Pease wasn’t sure if policy makers received the study. Her hope is to continue to study new business starts through five-year periods, though there’s no dedicated funding for this particular type of study.

She said there have been requests for county breakdowns, so she is confident that economic development folks are paying attention to it.

“It takes a lot of labor, time and detail work to clean [the data] up so we’re confident that these businesses are really new and don’t have ties to pre-existing businesses,” Pease said. “It’s one of those things that without a dedicated funding stream, it’s competing with other projects.”

In the report’s conclusion, Pease writes that the data supports “the characterization of new businesses as like a wave on the shore, delivering an initial surge of new jobs and wages accompanied by high levels of churn – job creation and destruction.”

As the effects those new businesses have on the economy ebb, succeeding “waves” of new business starts buoy the economy with new jobs and wages. After she began to track the 2008 cohort, she tracked new business starts in 2009 (2,143) and 2010 (2,316).

Pease can’t claim credit for the wave analogy, but calls it “very apt.”

“We certainly saw that with all the one-year studies we’ve done,” she said. “I was very interested to see that play out in a study over time.”

http://bangordailynews.com/2013/08/29/business/study-new-businesses-in-maine-survived-recession-at-rates-higher-than-national-average/ printed on December 18, 2014