Index of State Dynamism Measures and Methods

Core startup rate

What it measures: 

The median startup rate across industry sectors, excluding agriculture, mining, and utilities. It measures the degree to which a state generates new businesses across key industries.

How it contributes to dynamism: 

This metric captures the median share of businesses that were formed in the past year across major industry sectors, an important gauge of the entrepreneurial and risk-embracing tendencies of the local population. In contrast to the overall startup rate, which can be dominated by a single industry in smaller economies, the modified startup rate measures the median rate among industries (excluding the utilities sector, which is government-dominated, and the mining and agriculture sectors, which tend to be extremely volatile) to reward broad-based dynamism across sectors rather than booms in one industry, which may reflect temporary conditions or idiosyncratic factors. A healthy level of startup activity leads to greater innovation and productivity growth than in an economy which lacks this disruptive element. The presence of new firms—and the associated economic competition they bring—incentivizes existing firms to make investments and become more productive, while also providing more competition and options for workers who can move among firms seeking out greater compensation and better skills matching. 

Source: U.S. Census Bureau Business Dynamic Statistics

Share of workers at firms less than 5 years old

What it measures: 

Share of total state employment in firms that started within the previous five years. It captures both the volume of young businesses and how well they survive and scale.

How it contributes to dynamism: 

The share of the workforce employed by relatively young companies, meaning those five years or younger, is a marker of economic dynamism in that young firms tend to be more innovative and faster growing than their older competitors. Economies dominated by longtime incumbent firms are likely to be less innovative, grow slower, and use their market position to entrench themselves, extract special protections or subsidies from the public sector, and lower wages. Younger firms, by contrast, drive productivity growth forward and stoke healthier competition between firms, in both product and labor markets. Dynamic economies not only foster the creation of new firms, but also allow them to grow and challenge incumbents for market share. While the startup rate is a key component of economic dynamism, many new firms often fail, so this measure complements it by capturing a place’s ability to encourage and sustain businesses that survive beyond the initial phase of business formation. 

Source: U.S. Census Bureau Business Dynamic Statistics

Growth in total firms

What it measures: 

Annual percent change in the total number of employer firms. It indicates the overall health of a state’s business environment.

How it contributes to dynamism: 

Economic dynamism entails “churn,” or a consistent disruption of leading firms and industries by new upstarts, models, and methods. But churn alone does not specify which of the dual forces of creation and destruction comes out on top, so this measure captures the rate of increase (or decrease) in the total number of firms in an economy. Places where new firms outnumber closing ones, meaning that the absolute base of companies is growing, rise to the top on this measure, while places with dwindling numbers of firms fall to the bottom. More businesses opening than closing provides a signal of enduring growth, while places experiencing net closures are likely to become less competitive internally and provide fewer opportunities for workers. The overall change in firms also captures entrepreneurs’ volume and capacity to start businesses and survive in the market.

Source: U.S. Census Bureau Business Dynamic Statistics

Unique inventors per 1,000 residents

What it measures: 

Unique inventors contributing to new utility patents issued, expressed as each state’s number of unique inventors per 1,000 residents. It indicates a state’s proclivity for producing new ideas, invention, and innovation. Patents are attributed to the inventor’s state as provided by USPTO. 

How it contributes to dynamism: 

Patents are arguably the most tangible measure of innovation in an economy, representing new, unique, and valuable ideas—many of which will contribute to the commercialization of new products and new production methods that ultimately make firms more efficient or improve economic output. Utility patents are a specific category covering the vast majority of patents filed in the United States and are issued for the invention of a new or improved useful product, process, machine, manufacture, or composition of matter. Dynamic economies are more likely to host firms and innovators conducting research and producing new products and ideas. Even as the growth in patents issued over the last 20 years partly reflects the increased issuance of low-quality patents that don’t stand up to litigation, the measure still offers a good—if imperfect—proxy for innovation occurring within a state.

Source: EIG analysis of United States Patent and Trademark Office (USPTO) PatentsView data

Housing permits per 1,000 residents

What it measures: 

New housing permits issued, expressed as the number of permits per 1,000 residents. It indicates a state’s ability to absorb new residents.

How it contributes to dynamism: 

New housing construction is a physical and visible manifestation of economic dynamism in that it measures a place’s capacity to successfully and efficiently absorb new people. The metric is a proxy for churn and renewal in the built environment. Dynamic economies are able not only to attract new talent but accommodate it through the construction of new housing—ensuring that economic growth is not hindered by an inability to absorb additional residents. Even in places with stable populations, new housing permits symbolize reinvention and reinvestment, as opposed to stagnation or decline. This issue is particularly influenced by state and local government policies, and over time, local economies’ proclivity to build new housing has diverged dramatically, with nationwide consequences for housing affordability and geographic mobility.

Source: U.S. Census Bureau Building Permits Survey 

Reallocation rate

What it measures: 

The magnitude of shifts in labor among employers as firms open, close, expand, and contract, measured annually as the job creation rate plus the job destruction rate minus the absolute value of the net change in jobs. It measures the churn of workers among firms, which spreads skills and ideas across the economy. 

How it contributes to dynamism: 

The churn of workers across firms and jobs is a key ingredient of economic dynamism indicating that the economy is continuously reallocating labor and resources to more productive uses, leading to output- and wage-enhancing benefits from better optimized matches. More efficient allocation of human capital drives firm-level and economy-wide productivity growth higher, making businesses more innovative and efficient. At the same time, reallocation is good for workers, who typically get pay bumps when switching jobs. Barriers to mobility across employers likely both slow down productivity growth and lower workers’ wages. While low turnover may provide stability in narrow, short-term senses, in aggregate it signals an economy in which the pace of economic change is slow.

Source: U.S. Census Bureau Business Dynamic Statistics

Labor Force Participation Rate

What it measures: 

The share of the civilian noninstitutional population ages 16 and over that is either currently employed or actively seeking work in the labor force.

How it contributes to dynamism: 

This measure is primarily a reflection of a place’s ability to deliver economic opportunity combined with the population’s propensity to seek it. A dynamic, growing economy is one that not only attracts workers but also employs them at a high rate. States that score highly on this component will be those with both low unemployment rates and a younger working-age population. The higher the labor force participation in a state, the more its population is engaged in the active production of economic value. An economy that is either not able to provide jobs for its potential workers or lacks a workforce with the necessary skills to perform the jobs available is a major drag on potential economic dynamism.

Source: U.S. Bureau of Labor Statistics 

Migration rate

What it measures: 

The net movement of domestic and international migrants to and from a state as a percentage of the state’s population in the prior year.

How it contributes to dynamism: 

Whether a state is a net exporter or importer of people provides a good gauge as to whether the economy is dynamic, growing, and opportunity-rich. Population growth itself fosters dynamism, just as population loss saps it, and a dynamic economy tends to create market signals that attract workers and entrepreneurs seeking out benefits like higher pay and good investment opportunities. In turn, these new residents often contribute valuable new ideas and talent to local firms and may produce spillover effects that increase local economic productivity. 

Source: U.S. Census Bureau Population Estimates Program

How components are calculated and combined 

For each index component, we find the maximum and minimum value in the 1992-2021 period. Then, for each state-year in the dataset, we calculate the index component:

Index component = (Value – Minimum)/(Maximum – Minimum)*100

Each of the eight component indicators are then averaged together to produce the overall Index of State Dynamism score.