The average share of employment accounted for by firms less than three years old varies widely by state, according to analysis of newly released U.S. Census Bureau data. The Business Dynamics Statistics (BDS), funded by the Ewing Marion Kauffman Foundation, found that young firms account for as much as 12 percent of employment in Southwestern and Western states. In states with a lower-ranking of the share of young firms, primarily those in the East and Midwest regions, only about 6 percent of employment is accounted for by young firms.
Entrepreneurial rankings based upon the share of employment from young firms also tend to correspond closely—a simple correlation of 0.66—with a ranking of the employment growth experienced by the state. While this correlation is not a causal relationship, it is interesting since employment growth comes from the expansion of existing firms as well as the opening of new ones. This finding indicates that an important correlate of net employment growth is young firms.
The new analysis is reported in the second of a series of data briefings designed to highlight key features of the new Business Dynamics Statistics. The BDS provide researchers with comprehensive data, broken out by firm age, that are necessary to understanding the role of startup firms in job creation. The share of employment accounted for by young firms is just one of many possible indices that can be gleaned from the BDS.
A high fraction of employment accounted for by young firms is indicative of the overall dynamism of businesses in the state—the creation of jobs at new and expanding establishments and the destruction of jobs at contracting and closing establishments. Fast-growing states also have a high rate of dynamism.
Between 2000 and 2005, the BDS show that average annual employment gains at new and expanding establishments is 16.4 percent of total U.S. private sector employment (the gross job creation rate). For the same period, the BDS show that employment losses at contracting and closing establishments average to 15.1 percent of private sector employment (the gross job destruction rate). Thus, substantial churning of jobs and businesses underlies the U.S. private sector’s net employment growth rate in any given year (1.3% for 2000-2005).
Comparing these gross job flow measures with the state employment shares of young entrepreneurial businesses shows that high-entrepreneurial-activity states have both high gross job creation rates and high gross job destruction rates. Measured by job churning, these states have a high degree of business dynamism. At the state level, the correlation between the entrepreneurial activity statistic and gross job creation is 0.83, and the correlation between the entrepreneurial activity statistic and gross job destruction is 0.64.
The next BDS report will be released in March 2009. Further information about the BDS can be found at http://www.ces.census.gov/index.php/bds/bds_home.