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Startups Fuel Job Growth, Animated

February 5, 2016 at 9:45 AM

Startups and young, fast-growing companies create most new jobs during economic expansions, as we explain in our new report summarizing recent research on the dynamics of job creation.

“Startups” ― firms in their first year of existence ― play a critical role in job creation, according to analyses of recently developed federal data by economist John Haltiwanger and his colleagues.  During the Internet-driven boom of the late 1990s and early 2000s, for example, startups and high-growth firms — which are likely to be young — accounted for about 70 percent of all new jobs in the U.S. economy.  By contrast, businesses older than one year in aggregate lost jobs relative to their prior-year employment levels.

To a certain extent, startups’ outsized role in job creation results from how they’re defined and how their jobs are measured.  By definition, startups can only create jobs.  They can’t cut their employees through failure or downsizing because if a business fails before it reaches its first anniversary, it’s not counted as a startup.  Likewise, a startup’s employment level can’t shrink because it has no “year-zero” employment level to which to compare its first-year level.

Moreover, most startups fail.  Within five years, more than half are gone and many others go out of business a few years later.  Among the survivors, most start small and stay small. 

In their most important role, startups are the incubators of most of the rapidly growing firms that create a disproportionate number of new jobs during their early years — the so-called “gazelles.”  These firms — e.g., Google, Amazon, Tesla — produce average annual job growth of at least 20 to 25 percent by developing a new service, technology, or business model. 

Startups created roughly 3 million jobs per year on average between 1980 and 2010.  While half of those jobs were gone within five years because the companies didn’t survive, the other 1.5 million jobs remained.  Even more, the surviving firms included some gazelles.  As a result, the average surviving firm grew an astonishing 60 percent over the first five years, adding another 900,000 jobs to the economy.  At the end of the five-year period a given year’s batch of startups created 2.4 million jobs — a substantial contribution to total private sector employment, even if less than the original 3 million.  And that 2.4 million job-creation record for each annual cohort of startups was repeated in each subsequent year.  (Total annual private sector job creation during this period was significantly less than 2.4 million because businesses more than five years old lost jobs.) 

The animation below illustrates startups’ crucial role in job creation.