Fewer New Businesses Have Become Employers

Bottom line: The number of new employer businesses has not recovered to pre-Great Recession levels. This trend is troubling because new businesses have been shown to contribute disproportionately to job creation in the United States.

A relatively small share of new businesses become employers: slightly more than 11% of new business applications in 2019 became employers within eight quarters. Average job creation from employer businesses within their first 12 months of operations declined from about eight jobs to five jobs per 1,000 people between 1996 and 2019.

Between 2005 and 2019, the number of new business applications in the United States increased by 38.9%. Over the same period, the number of these applications that became employers within eight quarters decreased by 27.8%. The share of new business applications that intend to hire decreased from 34.9% in 2005 to 13.6% in 2019, and the share of new business applications that hired decreased from 21.1% in 2005 to 11.0% in 2019. In other words, intent to hire among new business applications nationally consistently exceeded the level of hiring activity.

Collective intent to hire exceeded new employer business actualization for every year in the period examined, using both actual and projected data. Even if every new business applicant that hired within eight quarters had also originally reported an intention to hire, the gap would persist.

How can this gap be explained? It could indicate the presence of barriers that entrepreneurs encounter in the business environment after starting the business, which specifically inhibit hiring. For example, the costs of searching, identifying, attracting, hiring, and maintaining an employee have increased. New businesses can also face legitimacy challenges in recruitment related to being small and being new.

If entrepreneurs thought they would grow enough to hire by a specific time, this could indicate that they did not reach the business milestones that they expected to achieve. Or, it could be that entrepreneurs realized they did not need to hire once they started business operations.

Read the full study HERE.