Business Dynamics Statistics Briefing: Where Have All the Young Firms Gone?

Building on a long-term trend, the nation's business startup rate fell below 8 percent for the first time in 2010, marking the lowest point on record for new firm births. New firms as a percentage of all firms continued a steady downward trend in 2010 – going from a high of 13 percent (as a percentage of all firms) in the 1980s to just under 11 percent in 2006 before making a steep decline to the 8 percent in 2010 – the most current year of data available.

This and other findings based on data on U.S. firms and establishments with paid employees is included in the Census Bureau's Business Dynamics Statistics (BDS) briefing. Partially funded by the Ewing Marion Kauffman Foundation, the BDS provides annual business data from 1976 to 2010.

Reduced numbers of new firms negatively affect the U.S. economy, which relies on startups as critical contributors to job creation. From March 2009 to March 2010, U.S. private-sector firms created a net -1.8 million jobs. The 394,000 companies that began operations in 2010, however, created 2.3 million jobs, in spite of the anemic economy.

Young firms – those five years old or younger – now comprise fewer than 35 percent of all firms, down from nearly 50 percent in the early 1980s. This decrease is accompanied by a decline in the share of employment accounted for by entrepreneurial firms from 20 percent in the 1980s to 12 percent in 2010. The share of job creation also has fallen, from more than 40 percent in the 1980s to about 30 percent in recent years.

The national decline is seen in all states, although some states have fared better than others. While the report does not analyze causes for individual state activity, it shows that state-level drops ranged from 2 percent to 14 percent when changes from the 1987-1989 and 2004-2006 business cycle peaks were compared. Further, states that experienced the largest declines also were, for the most part, those in which young businesses had the highest initial shares of business activity in the 1980s. These states typically were in the West, Southwest and South – the regions hit hardest by the recession.

In a study that measures annual employer and non-employer business creation in the United States, the Kauffman Index of Entrepreneurial Activity also showed a decline in the number of startups nationally and in all regions except the Northeast. In this study, founders were more likely to be sole proprietors than they were to create jobs.

This report is the sixth BDS Brief. The BDS includes measures of business startups, establishment openings and closings, and establishment expansions and contractions in both the number of establishments and the number of jobs. The BDS data provide these new statistics annually for 1976-2010, with classifications for the total U.S. private sector by broad industrial sector, firm size, firm age and state. The BDS is the result of a collaboration between the U.S. Census Bureau's Center for Economic Studies and the Ewing Marion Kauffman Foundation, with additional support from the U.S. Small Business Administration. Further information about the BDS can be found at www.census.gov.