Did start-ups hold back the recovery?

July 8, 2014

When you say the word start-up, many people think of the wild proliferation of tech companies in Silicon Valley: Stanford grads sitting in a basement with their friends being offered obscene amounts of money for a mobile app that simply sends a one-word message to a user’s contacts. But economically speaking, a startup is any business that’s less than five years old and has fewer than 20 employees. And, tech bubble or not, start-ups in general have not done so well in the wake of the Great Recession.

A new research note out from the San Francisco Fed concludes that “low growth among start-ups at the beginning of the current recovery may have contributed to slow employment growth overall.”

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Since start-ups often growth more quickly in the early stages of a recovery, the researchers think as much as 0.7% of overall job growth could have been added per year if startups had added as many employees as they did in previous recoveries.

The share of employment gains by newer small businesses early in this economic recovery Great Recession was abysmal compared to previous recoveries. (More specifically, the researchers looked at one year, from March 2010 – March 2011, which was the first March-March period with positive growth since the end of the recession.)  The slow growth may have had something to do with the housing crisis, since “about seven out of ten businesses used personal or family assets for start-up funding.”

“Because start-ups add so many jobs early in recoveries, even modest slowdowns in the creation of new businesses could significantly reduce overall employment growth,” say the researchers. By comparison, look at how 2010-2011 stacks up against the 1983-1984 recovery, which the researchers chose to showcase the last recovery from a really deep recession.

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