More job creation, less pay, more churn at startups: study

Newer companies and startups tend to hire at disproportionate rates, but pay 30% less than mature companies.

Newer firms are leading the way in job creation, suggesting that greater opportunities are arising within the startup community than with established organizations. However, employees at newer firms make 30% less than their counterparts in mature organizations.

These are the findings of a new study released by the Ewing Marion Kauffman Foundation, an entrepreneurial think tank. The study, based on the U.S. Census Bureau's Quarterly Workforce Indicators, finds that young firms disproportionately create jobs. The youngest firms (ages zero to one) account for about 15% of overall job creation while firms between two and ten years old account for about 25% of job creation. Combined, these two groups account for about 40% of job creation—much higher than their combined employment share of 25%.

The percentage of hiring based on job creation is much greater at startups than at more mature firms. Four out of every 10 hires at startups are for newly created jobs, much higher than in older firms, where the ratio fluctuates between 0.25 and 0.33.

While it could be argued that it only stands to reason that most, if not all,  job openings at young firms are newly created jobs, the Kauffman study adds that net job creation rates -- accounting for "job destruction rates" -- are still higher at startups, and tend to remain higher through economic downturns. Older companies, on the other hand, tend to experience net job losses during tough times.

While the study notes that startups were hit hard in the 2007-09 recession, "they are the group that has had the most robust recovery, with their job creation rate growing from 0.18 to 0.23 between 2009 and 2011."

The study also showed that earnings per worker are lower at young firms than at more mature firms. While this is not surprising, since larger firms have larger capital bases on which to draw, the research revealed that the firm age wage premium has risen over time, and that all real earnings growth in the last decade has occurred at established firms.

Just before the 2001 recession, workers at new firms earned about 85% as much as workers at mature firms. By 2011, this earnings ratio had dropped to 70%. The earnings premium associated with working for a large employer versus a smaller employer also grew during this time period: Average real monthly earnings in small firms fell from a high of 78% in 2001 to a low of 66% in 2011. The trend is exacerbated by a decline in the share of the number of startups, the study notes.

Young companies also have a greater rate of employee "churn," the study states. This is a good thing, because it reflects mobility and opportunity. Post-recession, only startups show signs of recovery in the pace of worker churning, which is critical to improving the allocation of employees to jobs and boosting wage growth over workers' careers. The study showed, however, that churning declined between 1998 and 2010 for all firm ages, with worker turnover as a percent of employment flagging as companies age.

As Dane Stangler, director of research and policy at the Kauffman Foundation explains: "If workers have fewer opportunities to change companies and job roles, as this research indicates, it will be harder for them to advance their careers and grow their earnings."

Employee turnover tends to drop during recessions as firms become cautious about hiring, and employees, with fewer jobs available, stay where they are. Turnover rises as economic opportunities rise.

(Photo: US Bureau of Labor Statistics.)

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