The Link Between Creative Destruction, Life Satisfaction

Although the uncertainty associated with business churn may cause concern for some, regions with more job turnover also exhibit signs of higher life-satisfaction, according to a recent study. In Creative Destruction and Subjective Wellbeing, researchers from Harvard University, Princeton University, and the University of Pennsylvania use cross-sectional MSA level data to analyze the relationship between turnover-driven growth and subjective well-being. Ultimately, the authors find life satisfaction is significantly higher in regions with high job turnover rates. 

Business dynamism refers to the continuous process by which firms are born, fail, expand and contract, leading to jobs that are both created and destroyed. As new markets are created and outdated models are replaced, this creative destruction plays a major role in several aspects of macroeconomic performance, including long-run growth, economic fluctuations, structural adjustment and the functioning of labor markets. University of Maryland professor John Haltiwanger notes that while the costs of this process are highly visible (e.g., unemployment and business failure, among others), the reallocation of jobs, workers, and capital to their best use is important to productivity gains and improved living standards over time.

In their analysis on the relationship between creative destruction and subjective well-being, the authors use a self-described “simple measure” of creative destruction: a region’s job turnover rate, or the sum of a region’s job creation rate and its job destruction rate. On average, MSAs lost 14 percent of their jobs a year from 2008 to 2011 while replacing 13 percent of their jobs. For the average MSA, the job turnover rate is 27 percent. To measure subjective well-being, the authors use the Center for Disease Control’s (CDC) Behavioral Risk Factor Surveillance System, as well as Gallup’s Healthways Wellbeing Index, which utilizes the Cantril Self-Anchoring Striving Scale, a commonly used metric in research on wellbeing.

The Cantril Scale asks respondents to imagine a ladder with 10 steps; step 10 – the top of the ladder – represents the best possible life for the respondent, while step zero – the bottom of the ladder – represents the worst possible life for the respondent. The survey then asks the respondent to state at which step they personally feel they are during the time of response (current life satisfaction), as well as how they think they will stand in about five years (future life satisfaction).

As expected, when the authors look across U.S. metropolitan areas, they find that in areas where unemployment is higher, the life satisfaction of residents is significantly lowered. What is surprising, perhaps, is that the authors also find that life satisfaction is significantly higher in places with a high job turnover rate. Holding unemployment constant, a 10-percentage point increase in the job turnover rate corresponds with approximately seven-tenths of a step increase on the Cantril Self-Anchoring Striving Scale ladder. Even when the authors do not control for unemployment in their model, they still find a positive correlation between job turnover and current life satisfaction.

The authors also find a relationship between job turnover rate and subjective well-being based on a region’s industrial composition. Creative destruction corresponds with life-satisfaction in regions where industries are growing more rapidly, as measured by a weighted average of productivity growth in a region’s different sectors, with weights corresponding to sector shares in the MSA’s total employment. When the authors do not control for unemployment, job turnover only has a positive effect on life satisfaction in MSAs with above median productivity growth. When controlling for unemployment, the authors find the effect is significantly positive everywhere, especially in those above median MSAs.

Subjective well-being is higher in regions where industries are less prone to outsourcing, as measured using a proxy variable based on the growth of China’s imports in each sector from 1991 to 2007.  Writing for Gallup, the authors suggest that the relationship between creative destruction and future life satisfaction in these cities may indicate that residents understand the long-term benefits of creative destruction. The perceived stability of these industries may contribute to economic confidence and future life satisfaction.  

Finally, in regions whose state policies have more generous unemployment insurance, there is also a strong relationship between life satisfaction and creative destruction. The authors suggest that unemployment insurance eases the transition during the uncertainty associated with creative destruction. In his analysis of the research, Richard Florida suggests that this is “likely because people are less worried about the job-destroying effects of technological change when there is a social safety net they can count on.”

Overall, the findings of Creative Destruction and Subjective Wellbeing provide new insight into the relationship between job turnover and life satisfaction. Despite the visible costs associated with things like business failure and unemployment, because the relationship between creative destruction is more pronounced on future life satisfaction than current life satisfaction, it appears that residents are capable of thinking about the advantages of creative destruction in the long term. 

Creative Destruction and Subjective Wellbeing can be found here: http://sticerd.lse.ac.uk/seminarpapers/dg28042014.pdf