Although conventional wisdom suggests that the annual net job gain at existing companies is positive, the fact is that net job growth in the U.S. economy occurs only through start-up firms, a new report from the Ewing Marion Kauffman Foundation finds.
Based on the U.S. Census Bureau's business dynamics statistics, the report, The Importance of Startups in Job Creation and Job Destruction (12 pages, PDF), found that both on average and for all but seven years between 1977 and 2005, existing firms were net job destroyers, losing a combined one million jobs per year. In contrast, during their first year new firms added an average of three million jobs. The report also found that while job growth patterns at both start-ups and existing firms were pro-cyclical, there was much more variance in job growth patterns at existing firms. Indeed, during recessionary years job creation at start-ups remained relatively stable, while net job losses at existing firms were highly sensitive to the business cycle.
And it's not just in net job creation that start-ups dominate. Although older firms lose more jobs than they create, the gross flows decline as firms age. On average, one-year-old firms create nearly one million jobs, while ten-year-old firms generate only 300,000. In other words, the notion that firms bulk up as they age is not supported by data.
Because start-ups that develop organically are the principal driver of job growth in the economy, job-creation policies aimed at luring larger, established employers inevitably will fail, said the report's author, Tim Kane. Such city and state policies are doomed not only because they are zero-sum but because they are based on unrealistic employment growth models, added Kane.
"These findings imply that America should be thinking differently about the standard employment policy paradigm," said Robert E. Litan, Kauffman Foundation vice president of research and policy. "Policy makers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting start-up firms."