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Up or Out: How Startups, Not Small Businesses, Create Jobs

Posted by: John Tozzi on November 1, 2011

A new paper from Bloomberg Government advances the notion that new ventures, rather than established small businesses, drive job creation.

From the report by BGov economist Ian Hathaway, who analyzed Census data:

[Y]oung companies, not necessarily small ones, are responsible for the substantial majority of job creation; in fact, outside of startups, small businesses as a group have shed jobs during the last two decades.

Much of the job loss in small, and particularly young, companies is associated with the closure of business establishments. Those that survive, as a group, contribute substantially to net job creation. In other words, young companies on average tend to either fail or grow rapidly.

That’s evident from this chart:

jobs by age and size.png

The top line shows the average number of jobs created by new businesses each year. By definition, this is always positive (it hovers around 3 million). More surprising: small businesses older than one year are shown in the bottom line. Because so many small businesses fail, this category shows net job losses every year in the last two decades.

Larger businesses appear to be more cyclical, creating jobs during good times and destroying them during downturns. But taken as a whole, large businesses never create as many jobs as startups in their first year do.

This builds on research last year by John C. Haltiwanger, Ron S. Jarmin, and Javier Miranda, who described the “up or out” trajectory that startups take:

Each wave of firm startups creates a substantial number of jobs. In the first years following entry, many startups fail … but the surviving young businesses grow very fast.

Add to this the Kauffman paper from last summer that found that startups aren’t creating as many jobs as they used to. They’re starting smaller and they’re growing more slowly. If that trend holds, it may mean that the unemployment crisis won’t be solved by small businesses or by startups.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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