Sunday, November 6, 2011

Latest Kauffman Foundation Report: New Business Startups Are Not Hiring Workers

In Chapter One of “Creating Wealth…” I draw on data from Kauffman Foundation studies on the formation of new businesses. (The Kauffman Foundation is a non-profit dedicated to business education and the encouragement of entrepreneurship.) A series of studies conducted by their researchers have consistently shown that past recession have not markedly reduced the enthusiasm of entrepreneurs for starting new businesses or hiring workers. On page 6 of my book I quote a recent Kauffman report, as follows:

“Firm formation in the United States is remarkably constant over time, with the number of new companies varying little from year to year. This remains true despite sharp changes in economic conditions and markets, and longer-cycle changes in population and education. Such constancy possibly reflects the nature of the United States economy, employment churn, and demographics. A steady level of firm formation implies that relatively few factors, such as entrepreneurship education and venture capital, influence the pace of startups…”

My point in citing these studies was that even in a depressed economy the spirit of entrepreneurism burns bright and opportunities to create wealth by starting new businesses are plentiful. A beneficial side effect is the creation of large numbers of new jobs by small, startup firms.

Unfortunately a new study released by the Kauffman Foundation in July of 2011 has concluded that the most recent recession – which economists have come to refer to as the “Great Recession” – has seen a 27% decline in new businesses that have at least one employee besides the owner, what are referred to as “employer businesses” as opposed to “non-employer businesses” in which only the owner is employed. The total number of new business startups has not declined, only those that create jobs for people other than the owner. To quote the Kauffman report summary:

“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. But that encouraging sign is somewhat misleading because firms that support only the self-employed owner do not scale to generate the new jobs needed to support overall economic growth.”

This trend, if permanent, has significant consequences for future job growth in the U.S. The total number of jobs created by small businesses in 2009 was approximately 2.3 million as compared with an average annual job creation of 3.0 million by startups over the past two decades. This is a “loss” of 700,000 jobs per year at a time when the economy has been struggling to produce new jobs for a growing number of unemployed workers. Worse, the Kauffman study indicates that the decline in job creation by new businesses can be traced back to 2006, that is, it predates the onset of the Great Recession. These losses may therefore be caused by structural problems in the economy and not recovered even if the economy returns to normal levels of growth. Once again quoting the Kauffman report:

"While the recession certainly deepened the jobs deficit, the U.S. economy stopped producing enough new jobs well before the downturn," said Robert Litan, Kauffman Foundation vice president of research and policy and study co-author. "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."

This is not good news for the U.S. economy but may serve as yet another wakeup call for those seeking greater personal opportunity or a higher level of economic security for themselves and their family. Jobs will be harder to find for the foreseeable future. Business owners will have greater control over their professional career and their financial security.

© Ralph Blanchard 2011


Reference: “New Firms are Generating and Holding onto Substantially Fewer Jobs in the U.S.; Kauffman Foundation Study Finds that U.S. Jobs Problem Pre-dates Great Recession,” Ewing Marion Kauffman Foundation. Accessed 22 September 2011.

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