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The Importance of Young Firms for Economic Growth


Abby Heidenrich (Jul-29th)

Kauffman Foundation - Job Creation

Young Firms Drive Job Growth and Economic Dynamism

"2 million jobs a year were created in the United State by companies less than 5 years old in 2015"

New and young companies are the primary source of job creation in the American economy. Companies less than one year old have created an average of 1.5 million jobs per year over the past three decades. On the flip side, between 1988 and 2012, companies more than five years old destroyed more jobs than they created in all but eight of those years. So, it's not a surprise that we are seeing economic growth coming from start-up companies. To simply it even more, that without start-ups there would be no net job growth in the US economy.

To read about more entrepreneurship indicators visit the Kauffman Foundations Indicators List.

Due to the stereotypes that are put out there through the media from the government, we are told that co are the thing of the future and that they are helping the economy, but they're leaving out a big factor for what's behind the economic growth - start-ups. The Business Dynamics Statistics (BDS) which is the first publicly available data set that incorporates the age of firms in a dynamic format backs up this point by stating there needs to be effective policy to promote employment growth must include a central consideration for startup firms. 

Of the overall 12 million new jobs added in 2007, young firms were responsible for the creation of nearly 8 million of those jobs.

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 by, Tim Kane, Kauffman Foundation. It's not only 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. 

Using United States Census Bureau data from 2006-2007, the net new job creation in terms of firm age rather than firm size. Until 2005, we knew that from 1980-2005, nearly all net job creation in the United States occurred in firms less than five years old. Without startups, net job creation for the American economy would be negative in all but a handful of years. If one excludes startups, an analysis of the 2007 Census data shows that young firms (defined as one to five years old) still account for roughly two-thirds of job creation, averaging nearly four new jobs per firm per year. Of the overall 12 million new jobs added in 2007, young firms were responsible for the creation of nearly 8 million of those jobs. Given this information, it is clear that new and young companies and the entrepreneurs that create them are the engines of job creation and eventual economic recovery. 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.

To read more about firm formation and economic growth click here: https://core.ac.uk/download/pdf/71355809.pdf