Every president since Ronald Reagan has, in a major address, repeated the claim the small businesses create most new jobs. Most U.S. companies are small – more than 99 percent of businesses earn less than $10 million per year, and most businesses with any employees at all have fewer than five workers. But most small businesses are not significant job creators. Only a small sub-set of businesses – mostly startups and young firms – truly make outsized contributions to job growth. In a new report, we make the case for adopting a narrow focus on helping these firms succeed.
To return to pre-recession employment levels, the U.S. economy must add almost 10 million new jobs. Historically, job creation has been driven by startups and young firms. Though they employ just three percent of the private workforce, startups contribute nearly 20 percent of net job creation. Of course, not all of these jobs last. After five years, about 40 percent of jobs created by startups are lost when the new firms go out of business. But the young firms that do survive go on to add jobs much faster than their older counterparts
Poor economic performance by young firms may be one reason that the economy has been unable to rapidly add jobs in this recovery. Since the recession began at the end of 2007, the share of firms that are young has been falling, and young firms are contributing a declining share of overall employment and job creation. Startup activity has not recovered since the recession. Before the recession, new businesses were adding an average of about 200,000 more jobs per quarter than they are adding in the recovery.
Startups and young firms have always faced structural disadvantages compared to larger, older businesses. But declining economic activity by young firms in the recovery suggests that in a weak economy, these firms are at even more of a disadvantage. Businesses that are just starting out don’t have the cash reserves to weather a few bad quarters. And though the situation has improved somewhat, access to credit for smaller firms was particularly constrained during the recession and its aftermath.
Focusing government attention and resources on helping startups and young firms overcome these disadvantages could pay large dividends. But there is also a role for large firms. A recent report by management consultancy McKinsey & Co. said that when it comes to spurring the growth of new firms, larger businesses “have a bigger role to play than is generally acknowledged”. If big businesses can help restart the U.S. jobs engine by helping startups and young firms, all businesses will realize the gains.