Startups Create Most New Net Jobs

During the State of the Union Address on January 24, 2012, the President referenced this important report…

From the Kauffman Foundation Research Series on Firm Formation and Economic Growth

The oft-quoted American sports slogan, “Winning isn’t everything. It’s the only thing!” could well be attributed to the economic importance of firm formation in creating jobs. A relatively new dataset from the U.S. government called Business Dynamics Statistics (BDS) confirms that startups aren’t everything when it comes to job growth. They’re the only thing.

By now it is well understood that firms large and small are continuously and simultaneously destroying and creating jobs. Even a mild level of this creative destructive churn points to a dynamic economy much different than static economic models can describe. However, beyond the job churn at existing firms, there is a dynamic in firm birth that seems to be very important for understanding job creation— specifically, the unique effect of new firms, or startups. Put simply, this paper shows that without startups, there would be no net job growth in the U.S. economy. This fact is true on average, but also is true for all but seven years for which the United States has data going back to 1977.

The BDS is the first publicly available dataset that incorporates the age of firms in a dynamic format (Haltiwanger, Jarmin, and Miranda, 2008). Figure 1 presents summary data from the BDS,1 showing that firms in their first year of existence add an average of 3 million jobs per year. By construction, the BDS defines an existing firm—age one up to age twenty-six and beyond—such that it can both create and lose jobs. In contrast, a startup, or age zero firm, only creates jobs because it experiences no gross job destruction. We might anticipate that the net job gain also would be positive at existing firms, but that is decisively not the case during most years on record. Notably, the figure shows that, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

Download and read the entire Kauffman Foundation report:  The Importance of Startups in Job Creation and Job Destruction