Kauffman Foundation Analysis Emphasizes Importance of Young Businesses to Job Creation in the U.S.

U.S. Census Data Showing New and Young Firms as the Primary Source of New Jobs Come at a Critical Time for Policymakers

The Ewing Marion Kauffman Foundation today released a study showing that newly created and young companies are the primary drivers of job creation in the United States. Though perhaps showing some improvement, the Bureau of Labor Statistics update on U.S. employment due out Nov. 6 will likely still show a dismal picture for American workers. Kauffman's analysis of U.S. Census Bureau data showing that companies less than five years old created nearly two-thirds of net new jobs in 2007 could not be timelier.

"Job creation is the number one issue facing families and policymakers during this economic recession, and this study shows that new businesses and entrepreneurs are the key factor in adding new jobs," said Carl Schramm, president and CEO of the Kauffman Foundation. "If the U.S. economy is going to have a sustained recovery, it will be up to entrepreneurs to lead the way."

The distinction of firm age, not necessarily size, as the driver of job creation has many implications, particularly for policymakers who are focusing on small business as the answer to a dire employment situation. This report shows that most net job creation is generated by firms that are one to five years old. These firms create more net new jobs than their older counterparts, as well as a higher average number of jobs per firm. In some cases, these young firms grow into large companies employing thousands of people. Importantly, these companies could still fail at some point or be acquired by older and larger companies; or they could stop growing and remain the same size indefinitely. Some of these firms, meanwhile, continue to generate positive rates of net job creation at older ages.

"During our study of Census data, we continually find that new and young firms drive economic growth and job creation," said Dane Stangler, senior analyst at the Kauffman Foundation and one of the study's authors. "Within this group of companies, moreover, there is a substantial set of rapidly growing businesses that account for a disproportionate share of net job creation."

Net job growth is marked by churn, the process by which jobs are created and destroyed by shifts in the economy. Each year new companies emerge to create lots of jobs and are succeeded in subsequent years by a new pool of firms. The net effect of this is to consistently add two million new jobs to the economy each year.

"This study sends an important message to policymakers that young firms need extra support in the early years of formation so they can grow into viable job creators," said Robert Litan, vice president of Research and Policy at the Kauffman Foundation and one of the study's authors. "Sometimes a single barrier, such as limited access to credit for business growth, can mean the difference between survival and failure. We must create an environment that aids firm formation and growth if we are going to turn employment around."

Kauffman-funded researchers have highlighted the importance of firm age in previous unpublished papers. But this report, which can be downloaded at www.kauffman.org/jobcreation, draws on a new set of data, a Special Tabulation conducted by the Census Bureau at the request of the Kauffman Foundation, calculated from the 2009 Business Dynamics Statistics (BDS). 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 on an annual basis, with classifications for the total U.S. private sector by broad industrial sector, firm size, firm age and state. Further information about the BDS can be found at http://www.ces.census.gov/index.php/bds/bds_home.

About 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. For more information, visit www.kauffman.org, and follow @kauffmanfdn on Twitter.