Startup Firms On The Rise But Still Below Pre-Recession Levels

The number of business startups has risen in recent years, but remains well below pre-Great Recession levels.

In 2015, 414,000 startup firms created 2.5 million new jobs, according to data from the Census Bureau’s Business Dynamics Statistics (BDS). The average in the 2002-2006 period was 524,000 startup firms and 3.3 million new jobs per year. The peak was in 2006, when 558,000 startup firms created 3.4 million jobs.

The recession undoubtedly contributed to the sharp decline in startup activity from 2006 to 2009, but BDS statistics from the past few decades show a downward trend in the share of jobs created by startups even before the recession. For more information, see Haltiwanger, Jarmin, Miranda (2011).

Young firms (startups and other firms less than 6 years old) accounted for 11 percent of employment and 27 percent of job creation in 2015. Measuring jobs created relative to existing employment, firms ages 1 to 5 had a job creation rate of 20 percent in 2015. This rate is above the Great Recession low of 15 percent in 2009 and it equals the average rate from 2002-2006.

Why focus on startups and young firms? One reason is their disproportionate contribution to new jobs. Jobs are created either when businesses open new locations or when there are year-to-year increases in employment at existing locations (job creation). Existing jobs are eliminated either when existing locations shut down or when there are year-to-year decreases in employment at existing locations (job destruction). Increases in the total number of jobs (net job creation) occurs when total job creation outpaces total job destruction.

By definition, job destruction for startups is always zero. That’s why their net contribution to new jobs is always positive. In 2015, net job creation for startups was 2.5 million. As the figure below illustrates, this was the highest level for any age class, reflecting the fact that they are the only age group where there is no job destruction to offset job creation.

Figure 1. Job Creation, Job Destruction and Net Job Creation by Firm Age: 2015

Source:  U.S. Census Bureau, 2015 Business Dynamics Statistics.

The figure also shows that young firms, aged 1 to 5, had negative net job creation in 2015. This reflects that the majority of new firms fail within the first few years. At the same time, a small subset of new firms grow rapidly, contributing disproportionately to net job creation. A second reason that startups are of particular interest is that they are needed to replenish the number of businesses that decline or close every year. Startups are thought to play an important role in bringing new ideas to market and disproportionately contribute to the innovation and productivity growth needed to raise standards of living over time. For more information on the role of startups, see Decker, Haltiwanger, Jarmin and Miranda (2014).

Kristin McCue is a Principal Economist in the Census Bureau's Center for Economic Studies and James Lawrence is a Survey Statistician in the Economy-Wide Statistics Division.