Small businesses are starting smaller and staying smaller. That’s the conclusion of a study released by entrepreneurship advocate Kauffman Foundation.
“Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation” said its analysis of government data shows that since the middle of the last decade and perhaps longer, the growth path and survival rate of new businesses means they are generating fewer new jobs.
The businesses that started in 2009, for example, are on course to create 1 million fewer jobs in the next decade than historical averages would predict, the study says.
The trend started long before the Great Recession and is likely to continue into the future, the study says.
That trend signals an important shift for the U.S. economy, which needs to create a minimum of 125,000 new jobs a month merely to keep up with adult population growth.
The Kauffman research distinguishes between numbers of businesses and numbers of businesses that have employees.
Citing data from the U.S. Census Bureau, the study found that the number of new employer businesses has fallen 27% since 2006. The total number of startups (employer businesses and self-employed) has increased since the recession, according to the Kauffman Index of Entrepreneurial Activity. But “firms that support only the self-employed owner do not scale to generate the new jobs needed to support overall economic growth.”
The Bureau of Labor Statistics says startups created about 4.65 million new jobs annually from 1997 to 2000 compared to 2.5 million in 2010, the study notes. The Census sets the drop off from 7 million jobs in 2006 to 4.5 million in 2009.
Part of the decline is that about 27% fewer businesses with employees are being started, the study says.
A second significant factor is that new small-business survival has declined. Before the recession, 45% to 50% of new businesses survived five years, the study says. Now fewer than 45% of businesses started in 2004 were still in business in 2009.
And a third factor is that new businesses are hiring fewer employees than in the past. In the 1990s, new establishments opened with an average of 7.5 jobs. By 2010, the number of jobs at the average startup was 4.9 jobs, according to Bureau of Labor Statistics.
And those businesses that survive never accelerate their hiring to make up for their smaller initial staffs, the study says. So over their lifetimes, these businesses created fewer jobs.
The study does not address why businesses are making do with fewer workers. Are they using technology instead of human labor? Are they doing work that requires fewer employees? Do minimum wage laws and health insurance mandates affect staffing levels?
The study concludes:
“In many cases, companies or individuals that once would have been hired as employees of a business now are performing the work on a temporary basis as contractors through other professional service organizations or under their own self-employment contracts. … No matter how laudable their individual efforts, these sole proprietors… are not likely ever to be major employers.
“The clear challenge for the U.S. economy instead is to start more employer businesses, ensure that they are starting larger, and nurture their growth.”
The study doesn’t suggest how.
Click here to read the entire report.
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