#212. Business Startups Critical to Job Creation

Business Startups Critical to Job Creation

The Kauffman Foundation is one of the largest foundations in the United States devoted to entrepreneurship. A recent Kauffman Foundation-funded U.S. Census Bureau study reports that “startup companies are a major contributor to job creation.”The Business Dynamic Statistics (BDS) include measures of establishment openings and closings, firm startups, job creation and destruction by firm size, age, and industrial sector, and several other statistics on business dynamics.

Following are highlights of the study:

“Job growth is essential for our economy to rebound, and this study shows that new firms have historically been an important source of new jobs in the United States,” said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. “Our research into the early years of business formation consistently shows how vital new firms are to our economy, and this data should give policymakers and budding entrepreneurs alike great hope for how we can solve our current crisis-create and grow jobs through entrepreneurship.”

The BDS data show that employment accounted for by U.S. private-sector business startups over the 1980-2005 period was about 3 percent per year. While still a small fraction of overall employment, these jobs from startups reflect new jobs, which is a large percentage compared to the average annual net employment growth of the U.S. private sector for the same period (about 1.8 percent).

The Figure below shows the fraction of jobs due to business startups for all firms and for selected firm size classes: micro firms and midsize firms to large firms.

Micro firms (firms with one to four employees) accounted for a large percentage of new jobs in any given year-about 20 percent on average. Although substantially larger startup firms (those with 250 to 499 employees) created a considerably smaller percentage of jobs in any given year-about 1.3 percent of employment in this firm-size class-their numbers still are substantial relative to net growth.

As the figure shows, business startups tend to be mildly procyclical. In business cycle downturns (shown in shaded areas) business startups decline slightly in most of the cyclical downturns (2001 is an exception). However, it is striking that business startups remain robust even in the most severe recession over the sample period (in the early 1980s). The procyclicality is more apparent for the business startups by micro firms.

This simple comparison highlights the importance of business startups to job creation in the U.S. During this time of economic uncertainly, we believe that this study echoes our sentiments on the value of entrepreneurs, not only to your communities, but to our country as a whole. Entrepreneurs will be in the forefront as our economy moves forward.

Additional information: Kauffman Report and BDS Briefing #1.