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Which Firms Create More Jobs: Startups or Older Firms?

Tuesday, November 7, 2017

Although startups account for only 2 percent of total U.S. employment, they play an important role in job growth. However, the importance of mature firms should not be understated, according to a recent article in The Regional Economist.

The authors of the article—Economist Maximiliano Dvorkin and Regional Economist Charles Gascon—examined how firms of different ages contributed to the net job growth between 2011 and 2014. In particular, they looked at the following:

  • Startups, or firms less than a year old
  • Firms with 1 to 5 years in operation
  • Firms with 6 to 10 years in operation
  • Mature firms, or those with 11 or more years in operation

Net Job Creation by Age of Firms

Dvorkin and Gascon found that the startups accounted for most of the net job creation from 2011-2014. The mature firms were the only other group that contributed positively, as shown in the table below.

Net Job Creation in the U.S., 2011-2014
Net Job Growth 10,173,430
Contribution to Net Job Growth by Age of Firms  
Startups 9,271,799
1 to 5 Years -1,058,923
6 to 10 Years -519,623
11 or More Years 2,480,177
SOURCES: Business Dynamics Statistics and authors' calculations.
Federal Reserve Bank of St. Louis

While startups create many jobs, the authors noted that young firms face a high probability of exit. “Successful young firms will continue to add more jobs on net, but about half of these firms will fail and close, resulting in considerable net job losses,” they wrote. “On balance, this up-or-out process leads to low levels of net job creation after the initial year for the firm.”

They explained that by the time firms have been in operation for 11 years, they are either “mom and pop” shops that are unlikely to hire more workers or high-growth firms that continue to hire. For either type, these firms tend to be more successful and tend to contribute positively to net job creation because fewer of them exit.

Importance of Mature Firms

In discussing the importance of mature firms, the authors noted that older firms pay, on average, a much higher wage than younger firms.

“This is because a firm’s success is a function of productivity: Output per worker at surviving older firms is higher and, therefore, workers are paid a higher wage,” they explained.

“Thus, while startups are very dynamic and have an important role in net job creation, in terms of total employment and earnings they tend to have a modest impact. Only the few firms that survive to the 11+ year age group have a lasting impact on employment,” Dvorkin and Gascon concluded.

Additional Resources

Posted In Labor  |  Tagged maximiliano dvorkincharles gasconstartupsentrepreneurslaborjobsemployment
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