When it comes to US job growth, startup companies
aren’t everything. They’re the only thing according to research published last
A study by the Kauffman Foundation, which focuses
on entrepreneurship, says new firms add an average of 3 million jobs in their first year, while older
companies lose 1 million jobs annually -- both on average and for all but
seven years between 1977 and 2005, existing firms are net job destroyers, losing
1 million jobs net combined per year. By contrast, in their first year, new
firms add an average of 3 million jobs.
Further, the study shows, job growth patterns at both startups and existing
firms are pro-cyclical, although existing firms have much more cyclical
variance. Most notably, during recessionary years, job creation at startups
remains stable, while net job losses at existing firms are highly sensitive to
the business cycle.
The study, The Importance of Startups in Job Creation and Job
Destruction, bases its findings on the Business Dynamics Statistics, a US
government dataset compiled by the US Census Bureau. The BDS series tracks the
annual number of new businesses (startups and new locations) from 1977 to 2005,
and defines startups as firms younger than one year old.
Last week, in a paper, which reports on research
using the same dataset, the researchers say an enduring notion about the US
economy is that small businesses create most private sector jobs. They stress
it's young firms rather than small firms which are responsible for most new net
John C. Haltiwanger, Ron S. Jarmin
and Javier Miranda, say firm startups account for only 3% of employment but
almost 20% of gross job creation. Young and small businesses disproportionately
create and destroy jobs and large mature firms exhibit robust adjustments along
the establishment entry and exit margins.
However, they also show that large,
mature businesses account for a large fraction of jobs. Firms over 10 years old
and which have more than 500 workers, account for about 45% of all jobs in the US
private sector. In turn, they show that these large, mature firms account for
almost 40% of job creation and destruction.
The researchers say young firms exhibit high rates of gross job
creation and destruction. Consistent with this pattern, they find that young
firms have very high job destruction rates from exit so that after five years
about 40% of the jobs initially created by startups have been eliminated by
exit. However, they also find that, conditional on survival, young firms grow
more rapidly than their more mature counterparts. In combination, their findings
suggest a rich “up or out” dynamic of startups and young firms that is
consistent with models of market selection and learning. The researchers say
understanding the process of job creation by private sector businesses requires
understanding this dynamic. Policies that favour various simply defined classes
of businesses (e.g., by size) and ignore this fundamental dynamic will likely
have limited success.
Another Kauffman Foundation study published this
month, says conventional thinking on employment from startups is that many of the jobs
they create evaporate as a high percentage of them fail only a few years later.
The new study, After Inception: How Enduring is Job Creation by Startups?
found, instead, that, while many new firms fail, destroying jobs, others also
thrive and create jobs. This growth in employment partially balances out the
jobs lost by closing and shrinking firms.
The study says the jobs created when startups are established do not disappear overnight. In
fact, they are remarkably durable. When a given group of startups reaches age
five, the group's employment level is 80% of what it was when it began.
In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving
firms (half of those that had started) had total employment of 2,412,410, or
about 78% of the jobs that existed when these firms were born.
The study bases its findings on an analysis of
the Business Dynamics Statistics
(BDS) dataset broken out by firm age to determine how total employment in
startups changes as those companies age.
By 25 years after firms start, only about 20% of them still exist, but
the employment numbers appear to level off at around 68% of their initial
values. The fact that establishments have decreased so rapidly yet employment
has more or less leveled out means surviving firms continue to grow. Firms fail,
but growth, even at these well-established firms, continues, keeping employment
from dropping with the number of establishments.
"Even starting a company during a recession adversely affects the new firm
for only a limited time," said Robert E. Litan, vice president of Research and
Policy at the Kauffman Foundation. "While a recession has a negative effect on a
company’s employment in its first few years, a recession does not impose lasting
consequences on startups. By age five, these firms’ employment reaches roughly
the same level as firms that were not started in recessions. So, firms started
during the current recession can expect their employment to catch up with
longer-term companies in the years to come."
Exposure to prolonged or repeated recessions, however, does adversely affect
job creation. Firms that weather many recession years seem to consistently have
lower levels of employment, the study showed, with startups surviving through
three recession years having about 10% less employment than those
surviving through none. This amounts to a difference of about 300,000 jobs, or
around 0.2% of all jobs in the economy. While the number of jobs lost due
to prolonged or repeated recessions appears to be small, these small differences
might compound over the years and across groups of companies to create a lasting
mark on the economy.
The study says the current recession is the longest in several years; thus, startups
established right before or at the beginning of the current recession might have
been significantly affected. On the other hand, as the US economy climbs its
way out of recession, the cohorts of new firms started now likely will not be
affected similarly, because they will have survived through fewer recession
The Importance of Startups in Job Creation and Job Destruction (pdf)
Jobs? Small vs. Large vs. Young -- John C.
Haltiwanger, Ron S. Jarmin and Javier Miranda
After Inception: How Enduring is Job Creation by Startups?