Startups creating fewer jobs than before: study

In the 1990s, new establishments opened their doors with about 7.5 jobs on average, compared to 4.9 jobs today. Why?

It's become well understood that a lot of the jobs created in economic recoveries come from startups and small businesses. However, while there is an abundance of startups popping up, they aren't creating as many jobs as startups of previous generations did.

Is this a reflection of a weaker economy, or something structural? New research released by the Ewing Marion Kauffman Foundation says that relatively low levels of employment at startups is part of a long-term trend.

The study looked at  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.

As Robert Litan, Kauffman Foundation vice president of research and policy, and study co-author puts it:

"While the recession certainly deepened the jobs deficit, the US economy stopped producing enough new jobs well before the downturn. 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."

Why the decline? The report's authors suggest that shifts in the way companies expand are influencing the development of the entrepreneurial sector. First, we're evolving to an entrepreneurial economy, and "our jobs outlook will be driven more by the collective decisions of the millions of young and small businesses whose changing employment patterns are not as easy to see or influence."

Second, more entrepreneurial ventures are small one- to two-person shops, driven by large-business outsourcing. "Companies or individuals that once would have been hired as employees of a business now are performing the work on a temporary basis as contractors through other professional service organizations or under their own self-employment contracts. These individuals, while sometimes characterized as 'entrepreneurs,' are not likely to employ others or to reach significant scale. No matter how laudable their individual efforts, these sole proprietors, almost by definition, are not likely ever to be major employers."

It's possible, however, that the study is missing on another emerging dynamic about entrepreneurial ventures. That is, the rise of digital businesses, including access to a wealth of resources via cloud computing and social media, makes it possible to launch new businesses with just a handful of people -- or by a single individual. High levels of automation also enable small-scale manufacturing with fewer people.

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.

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