SOURCE: Ewing Marion Kauffman Foundation

Ewing Marion Kauffman Foundation

July 07, 2010 13:14 ET

U.S. Job Growth Driven Entirely by Startups, According to Kauffman Foundation Study

New Firms Add an Average of 3 Million Jobs in Their First Year, While Older Companies Lose 1 Million Jobs Annually

KANSAS CITY, MO--(Marketwire - July 7, 2010) -  When it comes to U.S. job growth, startup companies aren't everything. They're the only thing.

It's well understood that existing companies of all sizes constantly create -- and destroy -- jobs. Conventional wisdom, then, might suppose that annual net job gain is positive at these companies. A study released today by the Ewing Marion Kauffman Foundation, however, shows that this rarely is the case. In fact, net job growth occurs in the U.S. economy only through startup firms.

The new study, The Importance of Startups in Job Creation and Job Destruction, bases its findings on the Business Dynamics Statistics, a U.S. government dataset compiled by the U.S. Census Bureau. The BDS series tracks the annual number of new businesses (startups and new locations) from 1977 to 2005, and defines startups as firms younger than one year old.

The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.

Further, the study shows, job growth patterns at both startups and existing firms are pro-cyclical, although existing firms have much more cyclical variance. Most notably, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

"These findings imply that America should be thinking differently about the standard employment policy paradigm," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. "Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies, when, in fact, policy has little effect on net employment growth. Instead, job growth best would be influenced by focusing greater attention on policy that supports startup firms."

Because startups that develop organically are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail, said the study's author, Tim Kane, Kauffman Foundation senior fellow in Research and Policy. Such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models.

And it's not just net job creation that startups dominate. While older firms lose more jobs than they create, those gross flows decline as firms age. On average, one-year-old firms create nearly one million jobs, while ten-year-old firms generate 300,000. The notion that firms bulk up as they age is, in the aggregate, not supported by data.

About the Kauffman Foundation

The Ewing Marion Kauffman Foundation is a private nonpartisan foundation that works to harness the power of entrepreneurship and innovation to grow economies and improve human welfare. Through its research and other initiatives, the Kauffman Foundation aims to open young people's eyes to the possibility of entrepreneurship, promote entrepreneurship education, raise awareness of entrepreneurship-friendly policies, and find alternative pathways for the commercialization of new knowledge and technologies. It also works to prepare students to be innovators, entrepreneurs and skilled workers in the 21st century economy through initiatives designed to improve learning in math, engineering, science and technology. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo. and has approximately $2 billion in assets. More information, visit www.kauffman.org, and follow the Foundation on www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.

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