A recent study by the Ewing Marion Kauffman Foundation finds that U.S. job growth is driven primarily by business startups. Or more accurately, the Foundation contends that net job growth occurs in the U.S. economy only through startup firms. The study, The Importance of Startups in Job Creation and Job Destruction, is based on the Business Dynamics Statistics, a U.S. government dataset compiled by the U.S. Census Bureau that tracks the annual number of new businesses (startups and new locations) from 1977 to 2005. Startups are defined as firms younger than one year old.
The Foundation’s study found that new firms add an average of 3 million jobs in their first year, while older companies lose 1 million jobs annually. And during recessionary years, job creation at startups remains stable. That’s not the case at existing firms.
This confirms the conclusion drawn by a 2008 study from the Rural Policy Research Institute’s Center for Rural Entrepreneurship. The report, Creating a System of Support for Entrepreneurs and Small Businesses in Kentucky: Insights and Policy Recommendations, describes how firms in Kentucky with less than 20 employees showed a 17.4 percent increase in net new jobs and firms with less than 500 employees showed a 21.2 percent increase, while those firms with 500 or more employees showed a 4.9 percent decrease.
A press release by the Kauffman Foundation states
Because startups that develop organically are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail…Such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models.
A similar finding is described in the Mountain Association for Community Economic Development’s publication, Accounting for Impact: Economic Development Spending in Kentucky, which describes how the state’s narrow emphasis on financial subsidies and industrial recruitment to attract established businesses means that other important strategies, like supporting entrepreneurs, are neglected. It recommends that Kentucky invest in creating a system of support for entrepreneurship and small business development, particularly by targeting investments to young people and early stage entrepreneurs.
Do you know of a startup that is not only weathering the recession but adding to the jobs available in your community? If so, we'd love to hear about it!