A declining rate of firm formation over the past three-and-a-half decades has brought with it a fall in job creation by new firms. Between 1978 and 2011, the contribution of new firms to employment at business establishments has fallen from 3.4 percent in 1978 to 2.0 percent.
Prior research has shown that new firms represent about half of new establishment job creation over the past 30 years. But the trends over time are different. The share of job creation coming from new firms has been shrinking, whereas the share coming from new establishments of existing businesses had been increasing until the Great Recession.
Existing businesses often open up new establishments when they need additional locations to serve markets. When a Walmart opens up a new location to serve a market it previously did not serve, it creates jobs by hiring employees to work in that new establishment.
Mark Schweitzer of the Federal Reserve Bank of Cleveland and Ian Hathaway of Ennsyte Economics, and I, analyzed the Census Bureau’s Business Dynamics database to examine what has happened to new establishment job creation over the past 35 years. We found that the decline in job creation by new companies has been offset by a rise in job creation at new establishments (locations at which business takes place) of existing businesses.
Our analysis shows that the rate of job creation from new firm formation declined from 4.01 in 1978 to 2.57 in 2007, while the rate of job creation from the creation of new establishments by existing companies increased from 2.29 in 1978 to 2.87 in 2007. (Both new the rate of job creation by new establishments of existing companies and the rate of new firm job creation declined from 2007 to 2009 during the Great Recession and have since recovered slightly.)
Neither the increase in job creation from new establishments of existing companies, nor the decline in job creation from new firm formation come from changes in the size of those establishments. Between 1978 and 2011, the average number of employees in a new outlet shrank from 21.48 to 13.90 people. Over the same period, the average number of employees per new firm increased from 5.40 employees in 1978 to 6.22 in 2011.
To give a sense of the magnitude of the changing sources of job creation, we estimated the number of new jobs that new firms would have created had they continued to generate jobs at the rate they did back in 1978 and the number of new jobs that new establishments of existing businesses would have created had they continued to generate jobs at the rate they did back in 1978. At the 1978 rate of new firm job creation, new firms would have produced an additional 2.39 million jobs in 2011. At the 1978 rate of new establishment of existing business job creation, these entities would have produced 828,000 fewer jobs in 2011.
The rising rate of job creation by new locations of existing businesses represents a shift in the source of new establishment job creation from independent entrepreneurs to existing businesses over the past three-plus decades.
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