Economic Development News & Insight

logo-horizontal

Start-Up Businesses Crucial to Employment Growth

/ September 30, 2014

With unemployment hovering just over seven percent, analysts seek to determine ways to get more people back to work. However, there is some disagreement over whether small or large businesses create more jobs in the United States. The answer, according to a growing number of economists, is difficult to determine, but many are citing start-ups as the most reliable job creators.

Responsible for Net Job Growth

According to the National Bureau of Economic Research, there is no systematic relationship between firm size and job growth, while other studies have found that nearly all of the net job growth in the country were through new firms. In addition, hiring by new firms is consistent during times of growth and decline, while existing firm hiring rises and falls with each economic cycle.

Urging Federal Support

These studies have led many economists to push for more federal support for start-up companies that would allow entrepreneurs to start new businesses at a faster pace. State Economic Development Offices are leading the charge for assistance to new companies with such programs as Project Pop-Up, a program offered in several states including Delaware and New York, which helps new businesses open in downtown areas by offering commercial space rent-free for three months. Other local municipalities offer tax incentives or reductions in impact fees in an effort to draw more business into an area. These are programs that many economists say the federal government should expand in order to promote the creation of businesses throughout the country.

Start-Up Job Creation Steady

Studies have found that during recessionary years, job creation at start-up companies remained stable, while existing businesses were more likely to eliminate jobs in an effort to reduce costs. This indicates that luring larger, established employers to an area in order to create jobs may not be as successful as local leaders would like. Instead, economists recommend that city and state leaders focus on encouraging new businesses to start in their local area, rather than working to bring a nationally recognized company as a means of job creation. In fact, one report found that, on average, one-year old firms create as many as one million jobs nationwide, while ten-year old firms only create about 300,000 annually.

There is research available that indicate a high failure rate for start-up businesses, but those statistics may not be entirely accurate. There are industries that do have a higher than average failure rate for start-ups, including restaurants, but others, such as high-tech industries have a much lower rate of failure. During the first year, the average failure rate for a start-up business is about 25 percent, indicating that 75 percent of start-ups are operating into a second year. The rate does rise to about 44 percent by the third year before tapering off, depending on the industry. With government incentives at the federal, state and local level, the success rate of start-up businesses could actually increase, further improving the job market in the area where the business begins.

Comments are closed.