Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation

20 Pages Posted: 12 Jul 2011

See all articles by E. J. Reedy

E. J. Reedy

University of Chicago - Polsky Center for Entrepreneurship

Robert E. Litan

Council on Foreign Relations (CFR) - Council on Foreign Relations- Washington D.C.

Date Written: July 1, 2011

Abstract

Although understandable in light of its traumatic impact, the Great Recession of 2007-2009 may be distracting attention from a more fundamental troubling economic trend. The United States appears to be suffering from a long-term leak in job creation that pre-dates the recession and has the potential to persist for an unknown time. The heart of the problem is a pullback by newly created businesses, the economy’s most critical source of job creation, which are generating substantially fewer jobs than one would expect based on past experience.

In other recent research, the Ewing Marion Kauffman Foundation pointed to downward trends in job creation economy wide, evidence of the often-cited jobless recovery of the 2000s, but also an indication of some economy-wide slowing in the dynamics of job creation (and, until the Great Recession, job destruction). In that research, Haltiwanger, Jarmin, and Miranda also point to the continued importance of startups to net job creation, but with some indication that the rate of job creation at startups might have slowed during the last decade. In this report, which is part of the Kauffman Foundation Research Series on Firm Formation and Economic Growth, we flesh out these findings by examining job creation in young businesses over an extended period. Even before the Great Recession, firms were starting smaller. They were opening their doors with fewer workers than the historic norm and were relatively reluctant to expand their workforces even during good economic times. Since at least the middle of the last decade and perhaps earlier, the growth trajectories and survival rates for these businesses meant that they were contributing fewer and fewer new jobs to the economy.

This trend has only worsened since the onset of the most recent recession. The cohort of firms started in 2009, for example, is on track to contribute close to a million jobs less in its first five to ten years than historical averages. The disappointing job trends can be attributed, in part, to changing industrial dynamics and long-term structural change, but there is still much to explore and explain. It is not clear at this point how long the patterns documented here will persist.

This research also builds on the 2010 Kauffman Index of Entrepreneurial Activity, which showed that the steady nature of those entering self-employment or business ownership (indeed, 2010 was the highest year on record in the United States for the Kauffman Index) was being driven by entry of businesses likely to provide less employment over time. This essay looks more deeply at new “employer businesses,” the subset of startup companies that create jobs other than those of the owner.

Keywords: job creation, recession, startup, economic growth, policy

Suggested Citation

Reedy, E. J. and Litan, Robert E., Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation (July 1, 2011). Available at SSRN: https://ssrn.com/abstract=1883660 or http://dx.doi.org/10.2139/ssrn.1883660

E. J. Reedy (Contact Author)

University of Chicago - Polsky Center for Entrepreneurship ( email )

5807 S. Woodlawn Ave., Suite 207
Chicago, IL 60637
United States
773-834-0812 (Phone)

Robert E. Litan

Council on Foreign Relations (CFR) - Council on Foreign Relations- Washington D.C. ( email )

1777 F Street, NW
Washington, DC 20006
United States

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