Tuesday, February 16, 2016

Growing Utah: The Impact of Startup Companies on the Utah Economy

Lecia Parks Langston, Senior Economist 

“The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” Peter Drucker

• Startup companies, those in existence less than one year, play a major role in Utah’s job creation. In 2013, Utah gave birth to more than 4,700 new firms adding more than 27,000 jobs to the Utah economy.

• New Utah firms have accounted for a smaller and smaller share of created jobs and total employment over time, following a national trend.

• During 1983, startup’s share of job creation peaked at 30 percent compared to 16 percent in 2013.

• The percentage of startup firms with one to four employees has consistently bounced around the 85-percent mark.

• Often during an economic downturn, firms one year and older will show negative “job creation.” Job creation from startup firms helps counteract these job losses.

• Young firms (one to five years old) account for a large share of firms going out of business and employment destruction.

Entrepreneurs — they’re those risk-taking individuals who start new business ventures and thereby fuel economic growth. They are so important to the economy that economists usually include entrepreneurship among the four factors of production. A report on entrepreneurship across states from the U.S. Census Bureau using pre-recession data ranked Utah fifth for the percentage of employment accounted for by young firms. In fact, the Intermountain West seems a hotbed of entrepreneurial activity. Nevada, Idaho, Wyoming, Montana, Utah and Arizona all topped the U.S. rankings. How do these startup companies spawned by the entrepreneurial spirit impact the Utah economy? The answers can be found using the Census Bureau’s Business Dynamic Statistics (BDS).

What is BDS?

BDS measures the openings and closings of businesses along with their job creation and destruction. Data is drawn from the Longitudinal Business Database which tracks individual firms over time. This information is available from 1975 through 2013. However, you might notice that at the beginning of the data series firm-age data is limited because no known startup date is available. The longitudinal nature of the data allows statistical tracking of individual firms rather than the typical net changes we publish from our nonfarm jobs data. BDS includes a wealth of information on job creation and destruction along with firm deaths and size. The beauty of this nationwide database is that a long-established firm which locates a new branch in Utah is easily differentiated from a true startup. Data on individual establishments and the various locations of a single firm is also available. However, this particular post focuses on startups and young firms.


It’s a Big Deal 

Startup companies, those in existence less than one year, play a major role in Utah’s job creation. In 2013 (the most recent data available), Utah gave birth to more than 4,700 new firms. These businesses added more than 27,000 jobs to the Utah economy. Even these impressive figures are overshadowed by the entrepreneurial zeal of the pre-Great-Recession boom. In 2006, roughly 7,000 new firms created nearly 40,000 new jobs.

Interestingly, in the three recessions prior to 2008, job creation among startups actually improved from the previous year. Not so in the 2008-2009 downturn. Employment creation from new firms tanked during the Great Recession and has not returned to its former strength. The period of time between 1992 and 2006 proved the golden years of startup job creation. Current new-firm expansion is more in line with the pre-1992 trend.


Startup’s Shrinking Share 

Of course, 1992 to 2008 were robust job creation years for all firms. Examination of just job creation shows new firms accounting for a smaller and smaller share of created jobs over time. During 1983, startup’s job creation share peaked at 30 percent compared to 16 percent in 2013. This Utah trend reflects the contracting job-creation share seen nationwide. In other words, startups are playing a smaller and smaller role in creating employment over time.

Currently, startups account for roughly 2.5 percent of total employment. Back in 1977, at the beginning of the longitudinal database, startup employment accounted for nearly 7 percent of all jobs. Over the past three decades, that share has slowly trended downwards, again following a similar pattern on the national scene.

When it comes to firms, a slightly different pattern emerged. The share of startup firms as a percentage of all firms also declined — from 20 percent in 1977, to 9 percent in 2013. However, during the brilliant decades of the 1990s and 2000s, the share of new-firms held relatively steady only to slip dramatically during the most recent economic downturn.


Size Matters 

Not surprisingly, most startups have few employees. The percentage of startup firms with one to four employees has consistently bounced around the 85-percent mark. Firms with five to nine workers fall far behind the leader with roughly 10 percent of new companies. In other words, approximately 95 percent of startups have fewer than 10 employees.


Looking Over the Net 

Keep in mind that job creation figures from BDS reflect those firms which added employment. Concurrently, other firms may be losing employment (job destruction). Net job creation equals job creation minus job destruction for any given year.

Net job creation figures reinforce the importance of startups to Utah’s economy. During the history of the database, startups have always accounted for the largest share of job creation. However, these firms are particularly important during recessions. Very often during an economic downturn, firms one year and older will show negative “job creation.” During the Great Recession (2009), nonstartup companies exhibited a net loss of more than 73,000 jobs. Without startups’ production of nearly 26,000 positions, the Utah’s economy would have been far worse off. The employment gains of startups certainly helped reduce the sting of recessionary losses in older firms.


What About Industries? 

BDS state-level information by industrial sector is not available. In addition, BDS uses the Standard Industrial Classification (SIC) industry coding structure available prior to the currently-used North American Industry Classification System (NAICS). However, the national figures suggest which industries generate the largest number of startups in Utah. In 2013, the old SIC services sector accounted for roughly half of all new startup firms and just under half of all startup employment. This sector included a vast array of industries ranging from hotels to auto repair to business services to healthcare. Retail trade generated another 20 percent of new firms and almost 30 percent of new-company employment. Finance/insurance/real estate ranked third adding about 10 percent of the startup firms.


Stayin’ Alive, Stayin’ Alive? 

Despite their auspicious beginnings, keeping a startup alive is no easy task. In 2013, more than half of all Utah’s business deaths were from firms less than 6 years of age. During the Great Recession, these young firms, aged one to five years, accounted for an even higher share (almost 70 percent) of all company deaths in Utah. Odds of firm survival improve the longer a firm can stay in business. Startups are most likely to fail at one year of age, and deaths continue to decline as a firm ages.

Young firms contribute a large share of job deaths. Between 1980 and 2008, young firms can be credited with 60 to 70 percent of firm deaths. On the other hand, post-recession, that share has decreased to about 54 percent. They also generate a fairly large share of job destruction — about 16 percent in 2013. However, since the 1980s this portion has trended downward.

With so many firms shutting down and losing employment, net job creation figures indicate job loss is a way of life for young firms. These companies exhibited net employment gains in only eight of the 36 years in the data series. They were particularly hard hit by the Great Recession, showing a net job loss of nearly 24,000.

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