It's Not Small Firms but New Ones That Drive Employment

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Small businesses are the economy's great job creators. Or are they? Last year a group of economists digging through new Census data, including a relatively rare measure of firm age, concluded that it's actually young companies, especially start-ups, that drive the effect normally attributed to small firms. Consider that in 2005, companies with fewer than 100 employees that had been around for five years or less created 4.7 million jobs, while older small firms created just 3.2 million jobs, nearly a third fewer. Now the researchers--the Census' Ron Jarmin and Javier Miranda and the University of Maryland's John Haltiwanger--are back with a new finding: start-ups haven't been pulling their weight during the most recent economic recovery. The young-firm advantage the economists observed in the data for 1992 through 2005 is largely missing. From 2006 to 2009, the number of jobs created in the economy fell by 25%, while the number of jobs created by start-ups fell by 34%. The likely reason? This recession was about not just slack demand but also a massive credit crunch. That particularly hurt young companies, the sort often financed by credit cards and home-equity loans. It may also be part of the reason jobs have been so slow to return.