Are Entrepreneurs Dragging Down the Economy?

Small businesses are the ones that are supposed to lead the economy out of recession. This time around, it seems that isn't happening. A new paper from the Kauffman Foundation says that startups are opening their doors with fewer employees and, once they get going, are hiring fewer people, regardless of the economic climate. Kauffman says this problem actually began before the recession and continues to be one of the factors dragging down the economy.

Robert Litan, Kauffman's vice-president of research and study co-author, warns that "we won't fix our core unemployment problem in the U.S. until young businesses get back on track."

Starting small

Using census data, the Kauffman researchers found that the number of employer firms--companies that create jobs for people other than their owners--has fallen 27 percent since 2006. The drop is particularly shocking because the level of entrepreneurial activity, according to Kauffman, has stayed pretty high during that time. The country has been minting brand-new businesses, and people have turned to self-employment, at a pretty steady rate. But fewer of those businesses are turning into the kind of enterprises that can create jobs.

A few of the worrying statistics from the report:

• Startups are creating fewer jobs. Historically, new US firms have created about 3 million jobs each year. In 2009 they created only 2.3 million jobs.
• Startups are smaller than they used to be. In the 1990s, new companies launched with about 7.5 employees, on average, compared to just 4.9 today. This doesn't seem so dire or so surprising. Big companies are outsourcing more, using technology to work more efficiently and hiring fewer full-time workers. Why should small companies be any different?

Staying Small

Historically, companies that start small tend to stay small. E.J. Reedy, a Kauffman Research Fellow and study co-author, says that if you look at all the businesses that open in a given year, you'll find that, as a group, they rarely add jobs as they get older. Some businesses hire people, and others fail entirely, with the result that the total number of people employed remains more or less stable. The fact that companies are opening their doors with fewer employees means that "falling contributions of jobs will be felt in the U.S. economy for years," Litan says.

My question is simple: Why should it be up to small businesses to save the economy? What about all those big companies?

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Image courtesy of flickr user Vadim Lavrusik

Kimberly Weisul is a freelance writer, editor and editorial consultant. Follow her on twitter at www.twitter.com/weisul.