Latest data show entrepreneurship remains subdued in the United States
The U.S. Census Bureau released the latest annual update of its Business Dynamics Statistics dataset yesterday. The dataset is a critical source of information on trends in new business formation and the broader company landscape in the United States. Unfortunately, the new Census data underscores that, even as many areas of the economy continue to recover from the Great Recession, American entrepreneurship remains in crisis.
First, let’s look at the historical trends. From 1990 to 2006, the startup rate — defined as the share of all firms in the economy that started in the past year — averaged 10.6 percent. Beginning in 2007, the Great Recession initiated a rapid collapse in the startup rate, inflicting what increasingly looks like permanent damage to the country’s ability to launch and grow new businesses. The startup rate hit a record low of 7.8 percent in 2010.
The new data for 2015 show that startup indicators continue to languish near that record low. The startup rate itself edged up to 8.1 percent in 2015, only 0.1 percentage points higher than the year before. This small step in the right direction comes nowhere close to reversing the longer-term decline in the nation’s startup rate.
In absolute terms, 414,000 new employer firms started in 2015, about 10,100 more than started in 2014. While that figure marks a welcome new post-recession high, a longer look-back reveals that American entrepreneurship remains a shadow of its former self. From 2000 to 2006, the economy produced an average of 511,000 new employer firms every year, meaning the United States currently faces an annual startup deficit of nearly 100,000 missing new firms.
Compounding the effect of a muted startup rate is the fact that new firms have diminishing heft in the job market. The United States had about 8,100 more startup jobs in 2015 than it did in 2014, but the overall employment impact of 2015’s cohort of startups was actually slightly smaller relative to the size of the (growing) economy. The approximately 2,467,300 new jobs created by the firms that launched in 2015 represented 2.0 percent of all jobs in the economy that year, down from the 2.1 percent of all jobs accounted for by startups in 2014. Again the impact of the Great Recession looms large in the background: In 2005 and 2006, the United States had over 1 million more jobs in new companies than it did in 2015.
Meanwhile, the data provide further evidence of the increasing dominance of older incumbent firms in the economy. The share of all U.S. jobs housed in firms at least 16 years old rose to a new record high of 73.8 percent in 2015, up 0.2 percentage points over the previous year. In addition, these firms accounted for fully 58.1 percent of gross job creation — another record in the series — compared to startups’ 14.7 percent. Young firms — those ages 1 to 5 — saw their share of gross job creation fall to a record low in 2015, suggesting that the same forces impeding startups from forming may also be making it more difficult for those that have emerged in recent years to survive and grow.
The recovery era has been just as good to incumbent firms when it comes to net job creation: As a group they are currently enjoying their longest stretch on record of net positive job creation: five years and counting. Prior to the recession, old established firms destroyed more jobs than they created in most years. This shift in the locus of job creation in the U.S. economy from young firms to old incumbent ones marks nothing short of a fundamental transformation in how the economy functions. The full consequences of this transformation are still unknown, but early evidence in the form of widening income, geographic, and other disparities suggests it may make inclusive growth even harder to achieve in the United States.
Rekindling entrepreneurship and business dynamism is an urgent challenge — one that should be the central focus of policymakers at every level of government. It’s time to prioritize bold new ideas — and remove hidden barriers — to make it easier to start, fund, and grow a business in every community.
To learn more about the importance of entrepreneurial activity to the health and performance of the U.S. economy, read EIG’s recent report, “Dynamism in Retreat: Consequences for Regions, Markets, and Workers.”