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Neutralism and Entrepreneurship: The Structural Dynamics of Start-ups, Young Firms, and Job Creation

Firm size is not an independent predictor of the small business sector's contribution to job growth. In particular, firm age is also relevant. Firm age and size are related since most young firms are small (because a new firm necessarily begins at a small size). But not all small firms are young, and some young firms get very big relatively quickly.

A recent study by Dane Stangler and Paul Kedrosky at the Ewing Marion Kauffman Foundation shows that the significant role that young firms play in job creation is partly an artifact of a structural feature of the U.S. economy. In particular, because start-up entry and survival rates have proven to be relatively constant over time, the number of firms populating the American economy grows annually. With the number of firms younger than age 5 about the same each year, they constitute a slightly decreasing proportion of the entire population of firms over time. But, because only a few companies survive past age 40 or so, young firms make up the largest cohort of all firms in the economy at any point in time. In this way, the economy remains perpetually young, and the fact that young firms account for a lot of the job creation follows partly from the fact that there are relatively so many of them.

The study also points out that the forces creating this structure are potentially subject to change. For instance, recent shifts—including the declining cost of company creation in information technology and other sectors—could significantly influence the rate of new company creation in certain sectors of the economy.

"Neutralism and Entrepreneurship: The Structural Dynamics of Startups, Young Firms and Job Creation"PDF logooff-site image
Dane Stangler and Paul Kedrosky
Ewing Marion Kauffman Foundation
September 2010

Abstract

An increasing number of studies and reports have shown that new and young companies account for most net job creation in the United States. This empirically documented reality, however, is not exclusively a result of new and young companies being particularly prolific or idiosyncratically superior to other firms.

Indeed, concepts such as job creation and entrepreneurship increasingly are conflated with young and small firms. Yet the age breakdown of job creation is partly a reflection of the dynamics of firm accumulation—how firms enter and exit and survive over a period of time. In any given year in the U.S. economy, new and young companies represent a plurality of all firms in the economy. That is, they make up the largest bloc of firms by age category, meaning their considerable job creation record is partly structural. This does not mitigate the contribution of these companies to job creation, but that contribution must be seen in the proper structural context.

 

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