Small Business

Briefs

After Inception: How Enduring is Job Creation by Start-ups?

It is temping to associate the survival rate of firms with the employment rate of firms. After all, firms that fail will have destroyed all the jobs they created. But if this were true, then the employment gains from start-ups would tend to evaporate relatively quickly. However, unlike the number of start-ups in a given cohort, employment in a cohort has the possibility to grow. In fact, some start-ups will grow rapidly over their first few years. So, if we are looking for employment that lasts, it is growth among new businesses that is important.

This is the finding of a recent study by Michael Horrell and Robert Litan of the Ewing Marion Kauffman Foundation. The authors also investigate the employment impact of recessions on surviving young firms. They find that start-ups, in terms of total employment, do not appear to be affected in the long term if they start in a recession, unless that recession is prolonged. To the extent that historical patterns are repeated, one implication of this finding is that cohorts that started right before or at the start of the 2007–09 recession may have worse employment outcomes relative to firms starting more recently.

"After Inception: How Enduring is Job Creation by Startups?"
Michael Horrell and Robert Litan
Ewing Marion Kauffman Foundation
July 2010

Abstract

We analyze a Business Dynamics Statistics (BDS) dataset broken out by firm age to determine how total employment in startups changes as startups age. Conventional thinking on employment from startups is that many of the new jobs created by startups evaporate over the course of just a few years as firms exit the market. By tracking cohorts of firms started from 1977–2000, we find this to not be the case. While many firms exit over the life of each cohort (destroying jobs), other firms also grow (creating jobs). This growth in employment partially balances out the jobs lost by closing and shrinking firms. We also look at how recessions affect employment in these cohorts of firms. We find that starting a firm during a recession does not affect employment levels five years later, but cohorts of firms exposed to prolonged recessions did experience significantly lower employment levels.

Key Findings

• Cohorts of firms started each year retain, on average, 80 percent of their initial total employment to age five.
• Older cohorts of firms exhibit increasingly higher employment retention rates over five years, but these rates are not substantially higher than those of new startup cohorts.
• Cohorts that start during a recession hire fewer people in the first few years following their birth, but they catch back up to the same levels of employment at age five.
• Prolonged recessions, on the other hand, appear to lower employment among cohorts. Cohorts at age five that had survived through portions of three recession years had roughly 10 percent less employment (as compared to their startup years) than cohorts of firms that encountered no recessions in their first five years.