Young Firms Lead Economic Recovery
A new report from the Kauffman Foundation reveals that the pace of recovery in hiring and job creation since 2008 is stronger in newer firms – those two years old or younger – than in more established companies. Job Creation, Worker Churning, and Wages at Young Businesses is the seventh report in a series using data from the U.S. Census Bureau’s Business Dynamic Statistics.
According to the report, despite elevated worker turnover rates, the percentage of hiring based on job creation is much greater at startups than at more mature firms. Four out of every 10 hires at young firms are for newly created jobs, much higher than in older firms, where the ratio fluctuates between 0.25 and 0.33.
Post-recession, only startups show signs of recovery in the pace of worker churning, which is critical to improving the allocation of employees to jobs and boosting wage growth over workers’ careers. The study showed, however, that churning declined between 1998 and 2010 for all firm ages, with worker turnover as a percent of employment flagging as companies age.
“Unless labor markets have improved at early-career job matching, a degeneration in churn rates may indicate that the U.S. economy is becoming less dynamic,” said Dane Stangler, director of research and policy at the Kauffman Foundation. “If workers have fewer opportunities to change companies and job roles, as this research indicates, it will be harder for them to advance their careers and grow their earnings.”
The research draws its conclusions from the U.S. Census Bureau’s Quarterly Workforce Indicators, which use federal and state administrative data on employers and employees combined with core Census Bureau data. The QWI recently began including firm age and size information, making it possible for the first time to review jobs, earnings and employment turnover by firm size and age, and to make regional and demographic comparisons.
The study also showed that earnings per worker are lower at young firms than at more mature firms. While this is not surprising, since larger firms have larger capital bases on which to draw, the research revealed that the firm age wage premium has risen over time, and that all real earnings growth in the last decade has occurred at established firms.
Just before the 2001 recession, workers at new firms earned about 85 percent as much as workers at mature firms. By 2011, this earnings ratio had dropped to 70 percent. The earnings premium associated with working for a large employer versus a smaller employer also grew during this time period: Average real monthly earnings in small firms fell from a high of 78 percent in 2001 to a low of 66 percent in 2011. The trend is exacerbated by a decline in the share of the number of startups.
Churning rates are procyclical, dropping during recessions as firms become cautious about hiring, and employees, with fewer jobs available, stay where they are. In both the 2001 and, especially, 2007-2009 recessions, worker turnover rates declined, but failed to recover to their previous peak after the recession ended. Churn rates for the youngest businesses recovered modestly after the most recent recession, but dropped slightly after first quarter 2011, perhaps reflecting eroding worker and business confidence, the study said.
[source: Kauffman Foundation press release]