The Census Bureau recently released data on the number of new businesses with employees created in 2013, and the figures are disappointing. The rate of creation of new employer businesses in the United States remains depressed.
The Census Bureau’s Business Dynamics Statistics (BDS) database tracks the number of new employer businesses created every year going back to the late 1970s. Using BDS data, I created a chart (below) that shows the rate at which new employers are started every year, both as a fraction of the number of existing businesses with employees and per thousand residents.
The figures show a disturbing trend. Americans are creating companies with paid employees at roughly half the rate they did 35 years ago. New employer firms accounted for 16.5 percent of all employer firms in 1977, but only 8.0 percent in 2013. In 1977, Americans founded 2.6 new employers for every thousand people. By 2013 that rate was down to 1.29.
While the pattern is far from perfectly linear — the R-squared for the trend measured as a percentage of all employers is 0.79, while the R-square for the trend measured as a per capita number was 0.66 — the long-term trend is clearly downward.
Moreover, not shown in the chart is the breadth of this decline. It is present in almost all major industry sectors, from high tech to retail to services, and is seen in every state and nearly every metropolitan area.
As I have discussed before, the declining rate of creation of employer businesses doesn’t necessarily mean that Americans have become less likely to start companies. In fact, data from the Census Bureau and the Internal Revenue Service both show that the rate at which people are creating new businesses without employees has increased over time.
The problem is the rate at which Americans start companies that employ others. This measure remains at, or near, record lows.
Help wanted ad photo via Shutterstock
If the government is serious about increasing the number of new firms that have paid employees they need to make that process easier. Adding that first employee incurs a high cost in administration and compliance. I’ve suddenly got to worry about making Social Security and withholding payments on time or facing expensive penalties. You start having to pay Workers Comp. It snowballs quickly and makes adding that first employee very unattractive. I think that many small firms just use freelancers on a 1099 because it makes things so much simpler.
Aira Bongco
I guess that although there are a lot of businesses that are opening, the trend is to maximize existing employees and not hire more people. I think the main reason is to minimize expenses.