Thursday, January 3, 2013

Startups are really important

A lot of people are surprised to learn that startup firms create more jobs than all other firms combined. This is a key reason for the common view that small businesses are the engines of job creation; as it turns out, that result is basically driven entirely by young firms.

To see how important startups are for the job market, take a look at Figure 1 (click for larger image). The figure shows the number of jobs created each year by startups (firms with age zero) and continuers (firms of age 1 or older). The blue bars are startups, and the red bars are continuers; blue+red = total employment growth.

Figure 1: Job creation by age

Observe that in most years, continuers are job destroyers on net. So, at least from an accounting standpoint, without startups we don't create jobs. Of course, given the high failure rate of startups, a lot of the jobs created by them are eliminated shortly thereafter. But the data paint a picture of a highly dynamic economy with large flows of jobs to new firms (discussed this here).

Do some industries produce more startups than others? Figure 2 shows startup job creation by SIC sector (click for larger image). The total height of each bar is total job creation from startups for that year.

Figure 2: Startup job creation by industry

Observe that the dominant startup industries are retail and services (by the way, my understanding is that your typical internet company is a "service"; that is the case at least for Facebook).

In both figures, you can see the epic decline in startup activity that preceded the Great Recession (I discussed this here). This startup collapse accounts for a major portion of the Great Recession's labor market problems (again, from an accounting standpoint at least).

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