On April 26, 2012 the House passed the Cyber Intelligence Sharing and Protection Act (“CISPA”) on a 248 – 168 vote. CISPA is supported by many communications and technology companies (e.g., Verizon, AT&T, Facebook, and Microsoft) as a critical step in protecting the nation’s infrastructure and national security from cyber attacks, by permitting the sharing of cyber threat information between private companies and the federal government. Critics (e.g., the ACLU, Center for Democracy and Technology, and others) strenuously oppose CISPA based on concerns it compromises individual privacy by allowing personal information to be shared with the government without adequate protections, oversight, or legal recourse. The White House opposes the legislation and has threatened to veto it in its current form.

CISPA, which would sunset 5 years after enactment, seeks to combat cyber attacks by allowing (but not requiring) private entities to use cybersecurity systems to identify, obtain “cyber threat information,” and share that information with other entities, including the federal government, “notwithstanding any other provision of law.” Such cyber threat information shared with a federal department or agency can only be used for (i) “cybersecurity purposes” (i.e., “the purpose of ensuring the integrity, confidentiality, or availability of, or safeguarding, a system or network”); (ii) investigating and prosecuting cyber-crimes; (iii) protecting individuals from serious bodily harm or death and related investigations; (iv) protecting minors from exploitation and serious threats of harm; or (v) protecting national security. While CISPA facilitates sharing of information to protect national security interests, it does not impose government cybersecurity standards on the private sector.

To address privacy concerns, CISPA provides that cyber threat information shared by the private sector with the federal government cannot be affirmatively searched other than for the purposes itemized above. The bill also forbids the government from using personally identifiable information from library circulation records, library patron lists, book sales records, book customer lists, firearms sales records, educational records and medical records. Information shared with the federal government is exempt from Freedom-of-Information disclosure and generally cannot be disclosed to non-federal entities (unless the sharing entity authorizes such disclosure), or used by the federal government for other regulatory purposes.

CISPA would also authorize (but does not require) the sharing of cyber threat intelligence obtained by “elements of the intelligence community” with private-sector entities and utilities holding appropriate security clearances. Those private-sector entities and utilities are encouraged to share such information with other cleared entities subject to certain restrictions. The federal government cannot condition its sharing of cyber threat intelligence with a private entity on that entity also sharing information with the government. Procedures will be developed, in consultation with the Secretary of Homeland Security, to ensure that operators of critical infrastructure receive “all appropriate cyber threat intelligence” possessed by the federal government.

Private-sector entities (including their officers, employees or agents) that use cybersecurity systems in good faith to identify, or obtain, cyber threat information or that share such information as permitted by CISPA are exempt from civil and criminal liability. CISPA provides a private remedy for the federal government’s intentional or willful violation of the permitted uses of information – the greater of actual damages, or $1,000 and attorney fees.

Focus now turns to the Senate which is expected to consider two competing bills this month (S. 2151, the Strengthening and Enhancing Cybersecurity by Using Research, Education, Information, and Technology Act of 2012 or “SECURE IT” Act sponsored by Senator McCain, and S. 2105, the “Cybersecurity Act of 2012” sponsored by Senator Lieberman). An anti-SOPA style campaign is already underway by privacy advocates to ensure that any Senate bill that emerges contains privacy protections that were not successfully included in CISPA. It is likely that substantial revision is necessary to avoid the threatened veto. In addition, while players in the online industry have been silent or quietly supportive of CISPA, Mozilla came out against it in the wake of its passing the House. Progress of the bill and related legislation in the Senate will be critical to watch in the coming weeks and months.

Based on a special request and a good conversation with the Governor’s Council of Economic Advisors last week at our meeting, the following graph is a modified version of the Portland, Seattle and the Rest post a few weeks back. The differences are that two lines have been added: Washington excluding both Seattle and Tri-Cities, and Oregon exluding Portland, Bend, Medford and Eugene. The reasons for doing so are Hanford and Housing. Tri-Cities’ strength, essentially added one percentage point to the good for the non-Seattle Washington, as seen by the differences in the green and purple lines below. The Oregon change is to try and strip out some of the housing bubble losses seen in both Bend and Medford. We know that the larger the housing boom and bust, the worst specific regions fared this business cycle. Given that Bend, Eugene, and Medford account for roughly 40% of non-Portland Oregon, their numbers will push the total category around. The end result is the differences seen by the two lower, blue colored lines, which is about 1.5 percentage points.

What the graph effectively shows is that the recession’s impact on non-Seattle Washington, once you account for Tri-Cities’ strength, and non-Portland Oregon, once you account for the huge housing bubble related losses in Southern and Central Oregon, are much closer than the original graph illustrated. During the conversation at the Council meeting I scribbled the following note to myself “Housing, Housing, Housing, Housing,” which is probably right when discussing the recession’s impact outside of Portland.

One technical note: the employment data is not officially benchmarked (revised) for the second half of 2011, and early indications are the non-Portland areas will show better employment numbers than seen above, although any upward revision is not expected to match the strength shown in the Portland numbers.

But is the measure all it’s cracked up to be?

Initiative Petition 35 is a proposed ballot measure – slated for the November 2012 ballot – which seeks to eliminate the corporate kicker and devote those resources to K-12 education.

IP 35 has been approved for circulation by the Secretary of State. It is a constitutional measure which will require 116,000 valid signatures to the Secretary of State by July 6.

The signature gathering effort, and the subsequent campaign, will be run by “Our Oregon,” the public employee union-backed organization that directed the campaigns for the Measure 66 and 67 tax hikes.

IP 35 simply adds a sentence to the Oregon Constitution that says that corporate kicker proceeds shall be “retained in the General Fund and used to provide additional funding for public education, kindergarten through twelfth grade.”

The corporate kicker is a tax credit for Oregon C corps when corporate revenues are realized in excess of 2% more than the close-of-session legislative revenue forecast. If corporate tax revenues come in more than 2% higher than projected, then the extra tax revenue is rebated back to C corp taxpayers in the form of a credit. Critics of the corporate kicker note that most of all corporate kicker tax credits go to C corps located outside of the State of Oregon.

History of the Corporate Kicker
1979 – 81 No kicker
1981 – 83 No kicker
1983 – 85 $13 million (10.6% of corporate liability)
1985 – 87 $7 million (6.2% of corporate liability)
1987 – 89 $36 million (19.7% of corporate liability)
1989 – 91 No kicker
1991 – 93 Suspended by Legislature ($18 million)
1993 – 95 $167 million (50.1% of corporate liability)
1995 – 97 $203 million (43.2% of corporate liability)
1997 – 99 No kicker
1999 – 2001 No kicker
2001 – 03 No kicker
2003 – 05 $101 million (35.9% of corporate liability)
2005 – 07 Suspended by Legislature ($344 million)
2007 – 09 No kicker
2009 – 11 No kicker
2011 – 13 No kicker is projected

In summary, over the past 16 biennia with the corporate kicker law:

There has been no corporate kicker in eight biennia;

The Legislature suspended the kicker for two biennia ($362 million total);

Oregon corporations have received a total of $527 million in kicker tax credits over the past 32 years;

The amount of total corporate kicker monies in question is $889 million over the past 32 years (Avg. of $27 million per year).

AOI Policy Regarding Kicker

AOI supports Oregon’s 2% “kicker” law, but will support a portion of “kicker” monies directed to the Rainy Day Fund contingent on regular General Fund deposits into the fund.
AOI supports full return of “kicker” monies to taxpayers contingent on fully funded Reserve Fund.

IP 35 contravenes AOI’s public policy positions on the kicker for a number of reasons, primarily because it directs corporate kicker monies into the General Fund, not the Rainy Day Fund. AOI supports using kicker monies to fund a State Reserve Fund that would mitigate the need for tax increases when the economy turns sour. AOI has traditionally opposed efforts to funnel kicker monies into the state’s General Fund, which would pump up government budgets and roll-up costs in a way our state’s economy is unable to sustain.

Policy Considerations for IP 35

The kicker is an unpredictable revenue source. AOI members should ask the following question, “Would Oregon have been better off with $527 million more in the baseline budget prior to the recent recession?” The $527 million in added baseline costs, which does not account for roll-up costs, would have exacerbated Oregon’s current revenue shortfalls.

The Legislature already has the ability to suspend the kicker law, which it has done so twice. In 2007, the Legislature suspended the corporate kicker in order to provide $344 million in seed funding for the state’s Reserve Fund. Putting corporate kicker proceeds into a state savings account is a much more prudent policy for shielding services from cuts during lean years. Plugging corporate kicker monies into the General Fund only exacerbates the cuts during lean years.

IP 35 is a non-solution to school funding. While the measure does earmark corporate kicker monies for K-12 education, it does not prevent the Legislature from backing out current K-12 resources to backfill other budgets. In other words, IP 35 merely enables a budgetary “shell game” that may very well result in no appreciable net benefit for K-12 funding. Whether K-12 receives any benefit at all under this measure will depend fully on the Legislature.

AOI has long supported a comprehensive revenue reform package that includes reform of the kicker laws. In 2011 and again in 2012, AOI supported Senators Frank Morse (R-Albany) and Ginny Burdick (D-Portland) in their attempt to create a more robust state Reserve Fund by using the kicker. AOI hopes the campaign over IP 35 is focused on legitimate issues and provides a long overdue statewide discussion about tax reform that would lower Oregon’s high taxes on income and investment and provide greater budget stability through an enhanced state savings account.

AOI is disappointed with the anti-business rhetoric that has been used to promote the measure thus far. What Oregon doesn’t need is for IP 35 to be the vehicle for Oregon’s public employee union groups to attack Oregon’s job creators for the next six months.

From “Got Your 6” campaign — Have you heard the phrase “I’ve got your six?” If you aren’t in the U.S. military, you may not have, but you will. Expect it to be on television, on the radio, in billboards, in movie theaters and across a variety of print media and social media platforms very soon. Spearheaded by the Clinton Global Initiative and ServiceNation, the “Got Your Six” campaign, which is an effort to “bridge the civilian-military” divide in the U.S. as more and more servicemen and servicewomen return from Iraq and Afghanistan….”

Catching everyone by surprise, Facebook co-founder Eduardo Saverin renounced his I.S. citizenship at the start of Facebook’s IPO. It is believed that Eduardo Saverin did it to save on taxes as Saverin owns 4% of Facebook. The move is not helpful in light of Facebook reaching for a double digit billion dollar IPO.

A statement from Saverin’s spokesman  said, “Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time.”A recent profile on Eduardo Saverin by the Wall Street Journal details how Saverin has been living the life of a billionaire entrepreneur, local investor and nightlife king in Singapore. Here is what the Wall Journal had to say on his celebrity status in Singapore.

“Mr. Saverin is regularly spotted lounging with models and wealthy friends at local night clubs, racking up tens of thousands of dollars in bar tabs by ordering bottles of Cristal Champagne and Belvedere vodka, according to people present on these occasions….In Singapore, Mr. Saverin is a Kardashian-like figure, with scores of fans hoping for a sighting. Local websites have set up forums with threads entitled “Where does one meet Eduardo Saverin in Singapore?” Bloggers and journalists have written long posts after spending mere seconds with the billionaire.Singapore’s Tatler, a society magazine, added him to its “300 List,” which celebrates the biggest power players here…”

It also must be noted that Saverin is Brazilian born and came to the United States in 1992 and became a citizen in 1998.

Read more

Unemployment Increase Looming?

I ran across this piece on five people who have left the labor force. It a why-and-how-are-they-dealing-with-it type of thing. What struck me was that four of the five were either back in college or planning on going back to college, some for advanced degrees.

Improving human capital is a reasonable response to long-term unemployment, but college may not be the best way. Technical schools should also be considered.

But, that is not the purpose of this post.

When people leave the labor force, they are no longer relevant to the unemployment rate. When they complete their education, or retraining, they will start looking for a job. At that moment, they become part of the labor force again. This will drive up the unemployment rate.

How big of an impact will this be? Based on the numbers from the article, it could be a big impact. The United States Labor force has declined by 3.4 percent since December 2007, from 66 percent to 63.8 percent. If 80 percent of the missing workers are increasing their human capital somewhere, as the article would imply, the impact would be huge.

I don’t think the article reflects a representative sample, though. So, let’s assume only 30 percent are increasing their human capital.

If we had the same labor force today that we had in December 2007, we would have 5.4 million more in the labor force than we do have today. We’ll call the difference missing workers. Some missing workers will reenter the labor force and some will not. To be conservative, we’ll assume the only people who will be reentering the labor force are the ones increasing their human capital.

If 30 percent of those missing workers are increasing their human capital, then 1.62 million will be again entering the workforce. That’s enough to significantly increase the unemployment rate. If it happened today, the unemployment rate would rise from 8.2 percent to 9.1 percent.

New Data: Oregon incomes 15% less than Washington incomes.

New 2011 data from the U.S. Bureau of Economic Analysis indicates that when it comes to per capita incomes, compared to the rest of the U.S., Washington and Oregon are on diverging tracks.

The per capita income of Washingtonians, at $44,294, is 6% higher than the national average.

Oregon’s per capita income, at $37,909, is 9% lower than the nation as a whole.

The numbers illustrate two states on different tracks.

In 1971, Washington’s per capita income was about 0.5% above the national average with Oregon’s being close, about 3% below that of the U.S. – so the gap between the two states was less than 4%. By 1981 the gap was 9%. By 1991 it was 10.7%. By 2001 it was 11.9%. And in 2011 it has widened to over 15%.

It would not be so disturbing if the gap simply reflected a difference between two states running ahead of the national average, one more successfully than the other. But it is the result of one state going up – and other down – relative to the rest of the nation.

We believe that Oregonians need a raise.

But to earn that raise, one thing is clear:

Oregon must change its approach to become more competitive in attracting and keeping jobs, notably in manufacturing, and avoid the rising specter of increased regulatory and cost barriers.

It requires that we make job creation a priority.

That’s why, over the past few months, we have advocated unapologetically for:

Exempting data centers from new intangibles taxation (upon passage of Prosperity Project-endorsed legislation, Apple announced plans to locate major data center in central Oregon)

Oregon withdrawing its share of water from the Columbia River in order to bolster agriculture and food processing (450,000 acre feet translates into 10,000 new jobs, $1.7 billion in additional income for Oregonians)

Increasing timber harvest on state-owned lands (2,000 new jobs, $440 million in additional income)

The expedited approval of a new Nestle water bottling plant (50 new jobs for the small town of Cascade Locks and a doubling of the town’s tax base)

Eliminating Oregon’s death tax (31,000 new jobs, $1.7 billion in income growth by 2017.)

Fixing a major problem that threatens to undermine Oregon’s workers’ compensation system (Oregon’s stable workers’ compensation system is a major competitive advantage for Oregon business that we can’t afford to lose.)

Each of these issues will make a huge difference for Oregon – helping us close the income gap with Washington and the rest of the country.

Here’s a more detailed look at the new income data for Oregon and Washington:

The Equal Employment Opportunity Commission (EEOC) has now modernized its stance on the use of criminal background checks by employers, a topic it had not formally weighed in on in over 20 years. The agency has issued a dense, 52-page enforcement guidance on employer use of arrest and conviction records in making employment decisions. There is no outright ban on criminal background checks, but the guidance makes the process more burdensome and tedious for employers who want to use this information to screen applicants or make other employment decisions.

Although the guidance reminds employers that different treatment of applicants and employees because of their criminal background history may be disparate treatment, much of the guidance discusses the possibility that using criminal records may lead to disparate impact discrimination. That is of particular concern since, according to the agency, national incarceration statistics “support a finding that criminal record exclusions have a disparate impact based on race and national origin.” The employer, then, essentially has the burden to show that its practices do not cause a disparate impact. This cannot be done merely by showing a racially balanced workforce, but might be validated by demonstrating local statistics on criminal records, or the lack of an adverse impact in employer hiring. For those employers who experience an impact, or who don’t want to rely on their ability to prove that there is no local or individualized adverse impact, the focus should be on establishing the “job-related and business necessity” defense to a disparate impact claim.

The guidance offers two ways for employers to establish this defense:

- Validate the criminal record exclusion for the position in question per the Uniform Guidelines on Employee Selection Procedures standards (if such validation is possible); or

- Develop a targeted screen considering the nature or gravity of the criminal offense, the time elapsed since the offense or completion of the sentence, and the nature of the job. Then provide an individualized assessment for all individuals excluded by the screen to determine whether the policy as applied is job-related and consistent with business necessity.
An individualized assessment may be time consuming and costly for employers, particularly those with heavy turnover or a lot of hiring activity. The agency wants an assessment to include an opportunity for the individual to demonstrate that the exclusion does not properly apply to him or her, and requires the employer to consider other relevant individualized evidence as to whether the policy as applied is job-related and consistent with business necessity or not. Although individualized screens are not required by Title VII in all circumstances, the EEOC suggests that the failure to use an individualized assessment is more likely to violate Title VII.

Although the 52-page guidance, available here, is a lot to digest in one sitting, employers do have the benefit of the agency’s suggested “best practices” which include:

- Eliminating overbroad policies that exclude individuals from employment based on any criminal record;
- Tailoring policies for screening applicants to identify the requirements of the job and determine specific offenses that may demonstrate unfitness for such jobs;
- Limit inquiries to criminal records for which exclusions are job related and consistent with business necessity;
- Train managers and hiring professionals on the new tailored policies and Title VII discrimination.

*****
Electronic Alerts are written by Barran Liebman attorneys for their clients and friends. Alerts are not intended as legal advice, but as employment law, labor law, and employee benefits announcements. If this has been forwarded to you, and you would like to begin receiving Electronic Alerts directly, please email Traci Ray at tray@barran.com. Copyright © 2012 by Barran Liebman LLP

Two Oregon businesses have just filed for bankruptcy.

Portland’s HemCon Medical Technologies Inc., makes bandages for wounded warriors. With only 65 employees, HemCon had revenues of $73 million four years ago. But for more than six years, it has been the target of a patent-infringement lawsuit by Marine Polymer Technologies Inc., a bandage-maker from Massachusetts. The lawsuit has been complicated, and twice rulings have been given in HemCon’s favor, especially since HemCon has reformulated its products to clarify that they do not infringe on any of Marine Polymer’s patents. But Marine Polymer just won on its final appeal, and HemCon is once again liable for huge damages. Whether it will be able to keep operating is unclear.

Lumber Products company is filing for Chapter 11, though it expects to be able to pay unsecured creditors. The Tualatin-based business was founded 75 years ago by Ernest Hall, who saw a need for wholesale distributors in the millwork business. Meeting that need brought Lumber Products to number 22 on Oregon Business magazine’s list of the state’s largest privately owned businesses, and two years ago the business was estimated to have revenues between $150 and $250 million. It has since fallen to number 32 on the list of largest private companies in Oregon.

Monday feels like forever ago when Al Armendariz resigned as an EPA Regional Administrator after his “crucify” oil and gas company comment zipped around the internet. Today, both the Washington Post and Wall Street Journal tackle what his comments mean for the agency.

First the Washington Post’s editors:

The most reasonable interpretation is also among the most disturbing — that Mr. Armendariz preferred to exact harsh punishments on an arbitrary number of firms to scare others into cooperating. This sort of talk isn’t merely unjust and threatening to investors in energy projects. It hurts the EPA. Mr. Armendariz was right to resign this week, while EPA Administrator Lisa P. Jackson denied that his comments reflected the agency’s approach. Yet the question will remain: Is an aggressive attitude like the one Mr. Armendariz described common among EPA officials?

Maintaining the legitimacy of the EPA’s broad regulatory authorities requires the agency to use its powers fairly and, in so doing, avoid the impression that its enforcement is capricious or unduly severe. Mr. Armendariz’s comments violated the latter principle.

They also mention the abuse EPA reaped on Mike and Chantell Sackett who only wanted to build a home an already developed subdivision. Last month, the Supreme Court ruled unanimously that the agency can’t strong-arm people “into ‘voluntary compliance’ without the opportunity for judicial review.”

In the Wall Street Journal, columnist Kimberly Strassel tells the story of how Armendariz worked closely with extreme environmentalists in Texas to attack energy producer Range Resources. EPA later reversed course and rescinded the order. Her conclusion: “The White House is hostile to fossil fuels, yet it has been unable to get Congress or the public to act. So it has unleashed the EPA to crack down on those industries.”

Both these columns make the same point: The “crucify” remark reminds us that EPA is out-of-control.

Economic indicators were again mixed in February 2012. As expected, the Oregon Measure of Economic Activity rebounded to -0.34 from an upwardly revised -1.10 in February (“zero” for this measure indicates the average growth rate over the 1990-present period). The three-month moving average improved slightly to -0.53.

Both the manufacturing and services sectors made net positive contributions the measure, while the construction and household sectors remained a drag. Low levels of building permits, still high unemployment, and low levels of consumer confidence were significantly weak components.

Note that current nonfarm payroll data is likely underestimating job growth in Oregon, suggesting that the Oregon Measure of Economic Activity will be revised upward. Considering the likely revision, Oregon is growing near its average rate of the last two decades.

The University of Oregon Index of Economic Indicators™ was flat in March. Underlying components were mixed. Initial unemployment claims edged up, and employment services payrolls, largely temporary workers, edged down.

Compared to six months ago, the UO Index rose 3.6 percent (annualized), a rate that suggests continued growth in Oregon in 2012. Similarly, the flow of national data is generally consistent with steady growth, although the pace remains below that necessary to quickly return economic activity to its pre-recession trend.

I’ve described my international economic forecast over on my Forbes site, comparing my views to the recent International Monetary Fund World Economic Outlook, April 2012. For a quick preview, consider the risks to the global economic outlook:

International Forecast

The height of the line shows the probability. “Muddle through” is the most likely scenario. Moving left, there’s the risk of a war with Iran, and then an even greater risk that Europe flames out in a financial crisis. More details at Forbes.com.

Taking a Bite Out of Wage and Hour Audits

On April 5, 2012, the Wage and Hour Division of the U.S. Department of Labor unveiled a Fair Labor Standard Act (“FLSA”) enforcement initiative to occur in the Portland metropolitan area, focused primarily on restaurants. The impetus for this crusade is to reduce common FLSA violations, including violations of minimum wage, overtime, record-keeping, and child labor. Examples of frequent violations found by the Wage and Hour Division on these inspections include:

- The failure to pay employees for all hours worked, such as for work done while the employee is supposed to be on a break and relieved of all duties;
- The misclassification of workers as “exempt” resulting in the failure to pay overtime wages to those employees;
- Improper deductions from employees’ paychecks; and
- Allowing minors to operate hazardous machinery, such as meat slicers and other bladed equipment.
These visits can come with some hefty consequences if violations are discovered. Between 2006 and 2011, the Portland office of the Wage and Hour Division found violations at 79 percent of the 281 restaurants it investigated and collected more than $3 million in back wages – both minimum wage and overtime – that was owed to more than 1,600 employees. Additionally, on top of the Wage and Hour Division’s administrative efforts to recover back pay through these investigations, employees also have a private cause of action to recover liquidated damages and attorney fees in addition to actual back pay. Employers may also be subject to civil penalties for each violation, and the possibly criminal penalties, including fines and imprisonment, for willful violations.

If the prospect of financial penalties is not enough, employers have another reason to take the investigations seriously: their public image. The Wage and Hour Division will be compiling their investigation information into their database on the Department of Labor’s website, which is available to members of the general public, including consumers and employees, at this link:

http://ogesdw.dol.gov. And in keeping up with the times, this information will also be available via a free smartphone application called “Eat Shop Sleep,” where consumers can find which restaurants, retail establishments, and hotels have been inspected, whether FLSA violations were found, and if back wages and penalties are still owed.

Although no official start date was provided by the Department of Labor for its enforcement initiative, employers should presume visits may be imminent. The best way to survive an audit is to be proactive. Take the following steps to prepare for a possible audit:

• Compile payroll, time records, employment history, job descriptions, and I-9 forms for all employees for the past three years. Review these documents to be sure they are complete and without mistakes.
• Review meal and rest break policies and verify strict compliance.
• Examine any employees classified as exempt to be sure they meet all the requirements.
• Review assignments and job duties for minors against the child labor laws.
• Consider engaging an employment attorney who has experience with Department of Labor audits, especially if you find mistakes or have concerns.

*****

Sean P. Ray is the firm’s newest associate, focusing his practice on employment & labor law. He defends employers, including restaurateurs, against discrimination complaints, sexual harassment lawsuits and retaliation claims, and represents employers in state court, as well as before Oregon’s Bureau of Labor and Industries. In addition to litigation, Sean also works with employers to draft and revise their employee handbooks to ensure compliance with changes in the law. Sean regularly writes about employment law cases and decisions, and he often provides on-site employment law training to help businesses prevent workplace grievances.

*****

Electronic Alerts are written by Barran Liebman attorneys for their clients and friends. Alerts are not intended as legal advice, but as employment law, labor law, and employee benefits announcements. If this has been forwarded to you, and you would like to begin receiving Electronic Alerts directly, please email Traci Ray at tray@barran.com. Copyright © 2011 by Barran Liebman LLP.

By Patrick Emerson,

I find the news that Reed College has hired John Kroger completely fascinating. To say he is an unconventional choice is a massive understatement. Outgoing Reed President Colin Diver was the one who really broke the mold, with only a B.A. and LL.B he was not a conventional scholar – the traditional choice of a college President. His hiring was especially interesting for an institution that has more of its graduates end up with Ph.D. than almost any other place in the US. Still, hiring another President without a Ph.D. and with few academic credentials is still very surprising. Perhaps it speaks to the success of Diver, whom the alumni and faculty seem to love. I would have had the opposite reaction to see Kroger end up at a public institution where political savvy is a desireable trait.

While the job of college president has become one almost entirely about ‘external relations’ (read: fundraising) especially for the big universities, I had the impression that small college presidents still had a reasonable sized hand in the day to day governance of the institution. I am guessing that this is now a false impression: I think it must all be about external relations. Witness the disastrous reign of Thomas Hochstetter at Lewis & Clark who was about as comfortable with public speaking and (one assumes) fundraising as the Pope is at an Act Up rally. He didn’t last long.

Reed, famous for its insularity, perhaps wants to become more open and engaged in Oregon. Or perhaps the same qualities that made him a successful candidate for Attorney General were evident in the interview process – he knows how to talk a good game and get folks to open their wallets. I, personally, hope it is at least some of the former. I think Reed has lost some of its luster partly because of its stubborn unwillingness to evolve. Perhaps that is still a strength, but I think less and less so in the 21st century.

Anyway, here is wishing Kroger good luck.

By  Phoebe Colman
Oregon Employment Department,

Discussions about job creation in the U.S. economy often focus on the relative importance of small versus large businesses as engines of economic growth. More recently, this conversation broadened to include questions about the dynamics of young businesses and the importance of business age in understanding job creation. This article explores the role of young business establishments in Oregon’s private sector, focusing on changes in birth patterns, survival rates, and employment growth during periods of recession.

Data on the age and survival rates of Oregon businesses come from the Business Employment Dynamics (BED) program of the U.S. Bureau of Labor Statistics. BED age and survival data measure over-the-year employment change in private-sector establishments from March of each year. The age of an establishment is determined by its date of first positive employment. A single business may operate at one establishment or multiple establishments. For this reason, an establishment birth can represent either the start-up of a new business or the expansion of an existing one.

To understand the importance of young establishments in Oregon’s labor market, we might first want to know how many of them exist, and how many jobs they represent. In March 2011, establishments that were five years old or younger accounted for 32.4 percent of the total number of establishments and 13.3 percent of private employment in Oregon (Table 1). Establishments born between March 2010 and March 2011 represented 8.0 percent of the total number of establishments and 2.3 percent of employment. By contrast, about two-thirds of all private-sector establishments were more than five years old. These older establishments accounted for 86.7 percent of private employment in Oregon.

These observations suggest that surviving establishments tend to grow over time. In March 2011, establishments that were less than one year old had an average of 3.6 employees, while those that were 1 to 5 years old averaged 5.8 employees each. Establishments that were 6 to 10 years old had 9.8 employees each, and the average size of the oldest establishments was 18.6 employees.

Comparing these distributions with figures from March 2007, before the onset of the last recession, it appears that younger establishments played a more prominent role prior to the recession. In other words, there were more young establishments in 2007, and they employed a larger share of the private-sector workforce than in 2011. The average number of employees per establishment was also larger for all age groups in 2007.

How can we explain these changes? Birth trends and survival rates are two major factors that affect establishment age distributions. How many establishments are born each year and how many jobs are created from these births? How long do new establishments survive and how much do they grow?

Table 1

Oregon Private-SectorEstablishments by Age
	March 2007			March 2011
Age	Number	Percent of Total		Number	Percent of Total
<1 year	10,116	9.5%		8,119	8.0%
1-5 years	29,239	27.6%		24,779	24.4%
6-10 years	19,364	18.3%		17,214	16.9%
11+ years	47,283	44.6%		51,558	50.7%
Total	106,002			101,670
Oregon Private-SectorEmployment by Establishment Age
	March 2007			March 2011
Age	Jobs	Percent of Total		Jobs	Percent of Total
<1 year	38,491	2.7%		29,375	2.3%
1-5 years	205,599	14.4%		142,766	11.0%
6-10 years	225,252	15.8%		169,349	13.0%
11+ years	955,525	67.1%		958,259	73.7%
Total	1,424,867			1,299,749

Young Establishments are Creating Fewer Jobs

Since about 2000, the number of establishment births in a given year tended to decrease during recessions and to increase during non-recessionary periods (Graph 1). On the other hand, the total number of jobs gained from births decreased markedly, even during periods when the number of births increased. In 2000, new establishments began with an average of 5.7 employees. By 2007, when the number of establishment births was at its height, there were 3.8 jobs gained for each establishment opening.

Declines in both series are sharpest during recessions. The period from March 2009 to March 2010 included the final months of the Great Recession and marks a record low for both the number of establishment births and the number of jobs gained from births over the span of the data series. In March 2010, there were 3.6 jobs gained for each establishment birth. The next year showed a very slight increase that still rounds to 3.6 jobs.

Significant decreases in both the number of establishment births and the number of jobs gained from these births partially explain why older establishments are more prominent in Oregon’s private sector in 2011 than they were in 2007. Survival statistics can offer further insights into the dynamics of young establishments and their prospects during periods of recession.

 

 

“Up or Out”: Survival of Young Establishments

Young businesses exhibit a characteristic “up or out” growth pattern, as described in the National Bureau of Economic Research’s August 2010 working paper titled Who Creates Jobs? Small vs. Large vs. Young. Each year, new businesses create a substantial number of jobs. Many of these startups fail in the first few years, destroying any jobs they created. Businesses that survive tend to grow quickly in their early years.

This “up or out” dynamic can be seen in survival rates for the cohort of Oregon establishments born between March 1999 and March 2000 (Graph 2). One year after they opened, 77.2 percent of these establishments were still in business, meaning that nearly one quarter of them failed in the first year. Another 11.5 percent closed the next year, and 6.5 percent the year after that. Establishment failures are a normal occurrence in any year, but they are much more common in a cohort’s first few years.

Employment patterns also reflect an “up or out” dynamic. In Graph 2, the bars labeled “Employment” represent levels at the surviving establishments as a percent of the cohort’s initial employment. The line labeled “Average Size of Survivors” is calculated by dividing cohort employment levels by the number of surviving establishments. For the 2000 cohort, the average size of surviving establishments is increasing over time. Although some jobs are lost due to establishment failures, these losses are offset by employment growth at surviving establishments. Businesses in this cohort opened with an average of about 6 employees. By March 2006, surviving establishments had doubled this to an average of about 12 employees.

 

 

Less “Up” and More “Out” During Recessions

The U.S. experienced two recessions in the past 10 years, the first from March to November 2001 and the most recent from December 2007 to June 2009. How did these events affect the survival and growth of young business establishments in Oregon?

Table 2 presents survival rates for cohorts of establishments in their first three years after opening. Reference periods highlighted with bold print coincide with periods of recession. For example, “March 2001″ is not highlighted in the first column of Table 2 because this cohort includes establishments born between March 2000 and March 2001, before the onset of the 2001 recession. However, this cohort’s one-year survival rate is highlighted because it was measured from March 2001 to March 2002, during and immediately following the recession.

On average, survival rates during recessions are 4 to 5 percentage points lower than comparable survival rates in non-recessionary periods. The relatively moderate 2001 recession had its largest effect on the survival rates of establishments born between March 2000 and March 2001, just before the recession actually began. Establishments born during that recession had survival rates on a par with non-recessionary averages.

In the case of the Great Recession, it is more difficult to say definitively which cohort suffered the most. This is partly because we do not yet have enough data to discern long-term trends for cohorts born in the last few years. It is also because this downturn lasted through multiple reference periods, and hit different cohorts at different stages in their early development. The 2006 and 2008 cohorts are a good example of this. These two groups of establishments both have a three-year survival rate of about 54 percent, but their survival patterns in their first two years are quite different.

The 2006 cohort has a one-year survival rate of 79.5 percent, slightly higher than the non-recessionary average. This cohort’s two-year survival rate coincides with the onset of the recession, and is slightly below the non-recessionary average. While it is common for a cohort to lose about 20 percent of its original establishments by the end of the first year and another 10 percent by the end of the second year, the 2006 cohort lost 13.3 percent in its second year. This group also lost 12.1 percent of its original establishments between the second and third year, compared to a normal rate of 6 to eight percent. Having fared well initially, this cohort’s three-year survival rate is below the recessionary average and among the lowest in the series.

The 2008 cohort’s first full year of operations occurred during the critical March 2008 to March 2009 reference period, right in the middle of the Great Recession. This cohort’s one-year survival rate of 70.8 percent is the lowest in the series. Although this group lost almost 30 percent of its original establishments by the end of the first year, its additional losses in the second and third years were 10.4 and 6.7 percent respectively. By this measure, establishments in the 2008 cohort that survived their first turbulent year were no more likely to fail in a subsequent year than those born in non-recessionary periods.

Employment of young establishments during recessions follows a pattern similar to survival rates (Graph 3). Employment dropped sharply for all cohorts during the Great Recession, and then stabilized as the recession ended and recovery began. For the 2008 cohort, the depths of the recession coincided with the first full year of operations, when this group likely would have experienced significant closures and job destruction even in a non-recessionary period. On the other hand, the 2006 cohort experienced its most critical “up or out” years before the recession began, then suffered a new shock just as establishment closures and job destruction would have normally been expected to level off.

The role of young businesses continues to be evaluated as a factor in understanding job creation in the U.S. economy. In Oregon, the Great Recession appears to have reduced establishment birth and survival rates and inhibited employment growth among young establishments. New establishments are also opening with fewer employees, a trend that has persisted for at least the last decade. As a result, younger establishments have a less prominent role in Oregon’s private sector in 2011 than they did before the recession.

For more information about BED age and survival data, please see&nbspwww.bls.gov/bdm.

 

 

Table 2

Survival Rates of New Establishments:First Three Years
Annual BirthsYear Ended:	Percent Surviving
	1 year	2 years	3 years
March 2000	77.2%	65.7%	59.2%
March 2001	73.1%	63.7%	57.5%
March 2002	78.7%	68.7%	62.3%
March 2003	78.9%	69.1%	62.3%
March 2004	79.3%	69.6%	63.7%
March 2005	79.7%	70.5%	61.2%
March 2006	79.5%	66.2%	54.1%
March 2007	75.4%	59.6%	51.5%
March 2008	70.8%	60.4%	53.7%
March 2009	75.4%	64.5%	-
March 2010	76.8%	-	-
Average (baseline)	78.6%	67.7%	59.8%
Average (recession)	73.7%	63.0%	55.6%

 

by Shawn Narancich, CFA

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