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Start-up Slowdown Hurt U.S. Recovery
 

A drop in the business creation rate has stalled an economic recovery, according to a new report.

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Despite the buzz surrounding tech start-ups in Silicon Valley, the nation's overall business start-up rate has fallen to a new low.

According to a new report released today by the U.S. Census Bureau, the business start-up rate—the number of new firms as a percentage of all firms—fell to a low of 8% in 2010, the last year for which data was available. That's down from a high of 13% in the 1980s and a rate of 11% in 2006.

The study also found that young firms—ones five years or younger—now constitute 35% of all firms, compared with nearly 50% in the early 1980s.

Javier Miranda, principal economist at Bureau's Center for Economic Studies and co-author of the study, said that although there are some variations in the start-up rate, the decline crosses both geographic and industry lines. "The decrease is pervasive across all sectors and states," he said.

The bureau's Business Dynamics Statistics study, co-funded by the entrepreneurship promotion organization the Kauffman Foundation, said that new firms are a critical aspect of the American economy because of their job creation capabilities. Kauffman vice president of research and policy Robert Litan said that the recent recession accelerated the decline in new business formation, in a press release about the study.

New firms are also contributing less to U.S. employment than in prior years, the study found. Entrepreneurial firms accounted for 20% of total employment in the 1980s. By 2010, that number had fallen to 12%. Along similar lines, the percentage of new jobs created by new firms fell from more than 40% in the '80s to 30% in recent years.

Young firms play a special role in the U.S. economy, Miranda said, as they create disproportionately more jobs than larger, more established companies. Miranda added that the slowing start-up rate raised concerns about the economy's ability to recover from the recession.

A lack of new companies typically means a lack of innovation, he said in an interview, and that prevents movement toward a more efficient economy.

IMAGE: Photo courtesy of Flickr user mbrochh
Last updated: May 2, 2012

JOHN MCDERMOTT is a business and culture reporter whose work has appeared in the Chicago Tribune and Playboy and on AOL.com. He recently moved from Chicago to Brooklyn, New York, to work for Inc.com.
@J_M_McDermott




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