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New Firms are Generating and Holding onto Substantially Fewer Jobs in the U.S.; Kauffman Foundation Study Finds that U.S. Jobs Problem Pre-dates Great Recession

http://www.kauffman.org/newsroom/new-firms-are-generating-and-holding-on...

Companies established in 2009 could employ one million fewer people than historic norm

(KANSAS CITY, Mo.), July 11, 2011 - Public discussion of the jobs shortfall in the United States has tended to focus on the Great Recession of 2007-2009, but new research released today by the Ewing Marion Kauffman Foundation suggests that the country faces a far more fundamental employment challenge that pre-dates the recession by many years: A long-term trend that the researchers call a slow jobs "leak."

The new study, the next in a continuing series on firm formation and economic growth, found that the new businesses that continue to generate the bulk of the economy's net job gains in recent years have been starting up with fewer workers than historic norms and are also adding fewer workers as they grow. Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation said its analysis of government data shows that since the middle of the last decade and perhaps longer, the growth path and survival rate of new businesses means they are generating fewer and fewer new jobs. The cohort of new firms that started in 2009, for example, is on course to contribute one million fewer jobs in the next decade than historical averages would suggest.

"While the recession certainly deepened the jobs deficit, the U.S. economy stopped producing enough new jobs well before the downturn," said Robert Litan, Kauffman Foundation vice president of research and policy and study co-author. "Historically, startups are the key to long-term employment growth, and they have been hiring fewer people for the last several years. We won’t fix our core unemployment problem in the United States until young businesses get back on track."

The study draws on data sources indicating a decline in the number of new "employer businesses," those startups that create jobs for workers other than the owner. Citing data from the U.S. Census Bureau, the study found that the number of new employer businesses has fallen 27 percent since 2006. When including new employer businesses and newly self-employed workers, the level of startups has held steady or even edged up since the recession, according to the Kauffman Index of Entrepreneurial Activity. But that encouraging sign is somewhat misleading because firms that support only the self-employed owner do not scale to generate the new jobs needed to support overall economic growth.

The study also examined young companies' size at birth, jobs created and survival patterns of new firms. They found that historically, new firms in the United States have generated about 3 million new jobs every year, but that recent cohorts have performed much worse, creating only 2.3 million jobs in 2009. At the level of individual businesses, one data series (BLS establishment data) showed that in the 1990s new establishments opened their doors with about 7.5 jobs on average, compared to 4.9 jobs today.

The study also found that as a group, recent cohorts of new businesses have been adding jobs at a slower pace than earlier cohorts even when they do well and grow, but that growth hasn't made up for lower employment levels at inception.

"Not only are these businesses starting out smaller than their predecessors, they are staying smaller," said E.J. Reedy, Kauffman Research Fellow and study co-author. "Cohorts of businesses rarely add jobs in the aggregate as they age. A cohort’s initial level of employment is likely the maximum number of jobs it will provide over its lifetime. Thus, falling contributions of jobs at new businesses will be felt in the U.S. economy for years."

The researchers said that rather than focusing on discrete events such as the opening of a new manufacturing plant or relocation of a large business to a local community, policymakers must recognize that the long-term jobs outlook will be driven by the collective decisions of young and small businesses whose changing employment patterns are hard to identify or influence. They also warned against the false hope that growth in the number of self-employed workers can resolve the U.S. employment shortfall.

"We need to find a way to start more employer businesses, ensure that they are larger and nurture their growth," Litan said.

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