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Job creation by new firms also reversed several years of decline, according to Kauffman Foundation analysis of U.S. Census data

(KANSAS CITY, Mo.) July 31, 2013 – New business formation in 2011 rose for the first time since 2006, the largest percentage increase in nearly a decade, according to the U.S. Census Bureau's latest Business Dynamics Statistics report.

While this is a welcome development, the pace of recovery for job creation has been tepid, especially at the young firms that drive employment growth for the entire U.S. economy.

"The Return of Business Creation" examines two classes of new businesses from among all new businesses formed in 2011 that most closely resemble entrepreneurship: companies less than one year old with one to four employees and those with five to nine. The study finds that the smallest of these new firms account for most of the increase in firm formation in 2011.

"This is a significant finding because it reinforces how important these young, small firms are to the economy," said Dane Stangler, director of research and policy at the Kauffman Foundation and co-author of the paper. "While it would be ideal to have more recent data, these are accurate measures of firm formation and job creation that policymakers and supporters of entrepreneurship can depend on for decision making."

Key findings in the "Return of Business Creation" paper include:

  • New companies with one to four employees comprise the vast majority of new businesses formed each year, accounting for, on average, 86 percent of new firms since the late 1970s in the BDS data.
  • New companies employing between one and nine employees accounted for 50 percent of jobs created by new companies, which actually represented a decrease from 2010. This highlights the larger relative role of bigger new companies in new job creation.
  • Of companies less than one year old, those with one to four employees have created, on average, more than 1 million jobs per year over the past three decades; those with five to nine employees have added, on average, half a million jobs per year.

While the rebound in job creation is encouraging, its rate of recovery lags well behind the pace of other recent recessions. In another paper using BDS 2011 data, "Anemic Job Creation and Growth in the Aftermath of the Great Recession: Are Home Prices to Blame?, researchers at the University of Maryland and Census Bureau explore the relation between the decline in housing prices at the heart of this recession and job creation at young firms

More work is required to determine the exact nature of that relationship, but whether through a demand channel or financing mechanism, it is clear that young firms experienced disproportionate declines in states most affected by the housing market collapse during the recession. Young firms have also not bounced back with their usual vigor.

To the extent that they have bounced back, however, the "Return of Business Creation" paper presents maps that illustrate the increased share of new business formation in most states and, for the first time, metro areas across the nation.

Sparsely populated states such as North Dakota, Wyoming and West Virginia saw the largest percentage increases, albeit from low bases. Louisiana and Mississippi experienced the largest declines.

"Seeing new firms and the accompanying job growth spread across the country paints a heartening economic picture of the U.S.," said co-author Ian Hathaway, economic advisor to Engine, a research and policy group for technology startups. "Follow-on research to be published later this summer will provide more insight into how these trends apply specifically to startups in the high-tech sector."

The Business Dynamics Statistics (BDS) series compiled by the U.S. Census Bureau tracks the annual number of new businesses (startups and new locations) from 1976 to 2011. More information about the BDS can be found at http://www.census.gov/ces/dataproducts/bds/overview.html.

The BDS represents what can credibly be deemed the gold standard of business creation data. In contrast to other indicators that combine employer firms (those coming into existence with employees) together with non-employers and self-employment, the BDS tracks only employer companies.

It also allows researchers to separate firms (unique businesses) from establishments (multiple locations of single firms, such as a new Starbucks location) and make important advances in data collection and policymaking.