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USA: Employment in start-ups depends strongly on the initial size

Friday 23 September 2011, by Emmanuel Darche

During the recent financial crisis, many redundancy plans occurred in France: Molex, Caterpillar, Goodyear ... Job destructions, often by hundreds, are indeed frightening. But the media coverage of these social plans and their related conflicts, should not obscure the fact that jobs destruction are taking place by thousands whatever the economic environment, and, at the same time there are also jobs creation by thousands. What is the balance of jobs creation and destruction? And what are the characteristics of the firms that ultimately create jobs?

Young firms create jobs

The Kauffman Foundation, a prestigious American think tank promoting entrepreneurship, published last year a study based on a Census Bureau database on business demography [1]. Here is a summary of its findings:

  • Whatever the economical environment, startups (companies created within the year) create more jobs than existing businesses (net of jobs destroyed):

Source : BDS (Census Bureau), Tim Kane
  • From their second year of life, companies begin, on average, to destroy jobs:

Source : BDS (Census Bureau), Tim Kane

For the Kauffman Foundation, the bulk of employment growth is determined by the vitality of entrepreneurs: startups create jobs.

Research conducted by American researchers on the same database support this vision [2]. At the opposite of the conventional idea that large groups destroy jobs while small businesses create jobs, the authors show that the real gap is mainly due to the age of the company, not its size: more a company is young, more it tends to create jobs, regardless of size.

Dependence on the initial size of firms

We can actually go further by exploiting the same database. Considering the graph above, we can split companies into two groups: those created with less than 9 employees and those created with more than 10 employees.

Source : BDS (Census Bureau), IRDEME calculations

Source : BDS (Census Bureau), IRDEME calculations

We find that more a firm has employees at its creation, more it tends to have a better net job creation over time. This is even more visible on the graph below which shows the evolution of the employment depending on the initial size of companies (number of employees at the creation: 100%):

Source : BDS (Census Bureau), IRDEME calculations

The more a company has employees at its creation, the more it tends, on average, to preserve its jobs. While confirming that employment is more likely to be created in the startups, this conclusion leads to a double contribution:

  • The more employees has a startup at its creation, the more jobs it creates (for a given year, we have a higher jobs creation ratio for businesses with a larger initial size);
  • Employment is better preserved in companies with an initial large size (we have a longer employment preservation duration for firms with a larger initial size).

Conclusion

Thus, startups with a significant initial size are most likely to create sustainable jobs. Fortunately, all major groups are not doing redundancy plans every year, but this study shows they do not create jobs on average. These are young and dynamic companies from their creation, which are the source of jobs creation, and the Government should reduce the barriers to innovative start-ups creation rather than focus on supporting large firms, for example by reducing the administrative weight on multi- employees firms creation, and by creating a favorable environment for investment in startups.

Footnotes

[1Tim Kane, The importance of job creation in startups and job destruction, Kauffman Foundation, July 2010

[2John Haltiwanger, Ron Jarmin and Javier Miranda, Who creates Jobs? Small vs. Large vs. Young, NBER Working Paper 16300, August 2010

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