Monday, March 4, 2013

Two economies of young firms, contd.: Tracking cohorts

In  a previous post, I explored some data on job creation and destruction by firm age classes. Those data suggested that after creating lots of jobs in their initial year, cohorts of startups diverge: some continue to grow (fairly rapidly) while others shrink (also fairly rapidly) and disappear. In that post, I was looking at age categories by year rather than tracking individual cohorts of new firms. Tracking cohorts seems like it would be interesting, so Figure 1 displays net job creation for several firm cohorts as they age (click for larger image). I use cohorts born at five-year intervals starting in 1980, then I track them for their first five years (the BDS begins lumping age classes together after that).

Figure 1

The chart basically confirms the conclusions from my last post. For one-year-old firms, we see a mixed bag: some cohorts are still growing while others are already shrinking. Obviously, some of this is driven by broad economic conditions faced by each cohort (for example, the 1980 cohort's first few years were in and out of recessions). By age 2, all cohorts are shrinking in employment terms and will do so through age 5 (with one small exception). Recall, though, that these are net employment numbers; my last post showed that this kind of aggregation is actually hiding the fact that many firms grow rapidly in these age categories.

Figure 2

Figure 2 uses the same data but reports cumulative job creation totals by age (rather than simple annual flows). This allows us to compare cohorts' cumulative effects on labor demand, though it's important to keep in mind that more recent cohorts faced a larger economy than those from previous decades and might therefore be expected to create more jobs.

The 1980 cohort is the only group to have been born around recession. The 2005 cohort saw deep recession as well, basically starting at age 3 but really deepening around age 4 (which is reflected in the chart). Nearly all cohorts see their cumulative net job creation decline over time.

Due perhaps in large part to the "two economies" idea, firm cohorts begin life by adding lots of jobs to the economy; thereafter, they become net job destroyers. Over a 5-year horizon, the cohorts reverse the large positive effect they initially had on job demand, gradually reducing their cumulative contribution to job creation.

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