Robert Litan of Kauffman Foundation has stressed that generating new start up companies may not be an answer to the US unemployment problem. He thinks that creating new businesses may not be a perfect answer for addressing the existing job problem. A better idea is to help existing small businesses to hire more employees.
There are many problems that start-up businesses face in their attempt to create new jobs. First of all, lots of people start a new business and it is found that just a shrinking fraction of new companies hire employees. The Census Bureau data revealed that in 1997, 26 percent of small businesses had employees and in 2008 it dropped to 21 percent. Bureau of Labor Statistics states employment rate fell from 62 percent in 1995 to 56 percent in 2005. Moreover, it is also found that new companies that are hiring are employing very few people. The BLS figures also establish the fact that there is a drop of employment in new businesses from 5.7 to 4.0 between the first quarter of 1999 and second quarter of 2009.
The 1990 Census Bureau Data reveals 2.34 employee businesses got created for every 1000 Americans. The startup businesses number, however, fell to 2.06 in 2008. Global Entrepreneurship Monitor 2009 reports population involved in starting new businesses fell from 10.6 % in 2005 to 6.9 % in 2009.
Then there are also businesses that will fail soon as they are not generating enough funds and are paying employees from founders’ savings. So, to redeem these soon-to-be-out-of-business focusing on existing small business would be a good step to solve unemployment problems. That is why it is not a very good idea to stimulate formation of new businesses.
Research shows that established small businesses are more likely to create more jobs than the young ones. Organizations aged one to five years are found to be the biggest job destroyers in the economy. It is also found that new companies offer fewer benefits, pay less and mostly offer part-time jobs.
John Haltiwanger of University of Maryland and Ron Jarmin & Javier Miranda of the U.S. Census Bureau prepared a paper that says “3 percent of employment is accounted for by firm births and about 15 percent of employment is accounted for by firms less than 6 years old. However, more than half of employment is accounted for by firms more than 16 years old.”
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to