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Tuesday, July 08, 2014

FRBSF Economic Letter: Slow Business Start-ups and the Job Recovery

Liz Laderman and Sylvain Leduc:

Slow Business Start-ups and the Job Recovery, by Liz Laderman and Sylvain Leduc: Employment growth during the current recovery has been weak compared with past recoveries. It has taken nearly five years since the beginning of the economic expansion for nonfarm employment to return to its pre-recession peak. One factor that may have contributed to this tepid job growth is slower-than-normal employment growth at new businesses, or “start-ups.” Because start-ups generate jobs at a much faster pace than older businesses during recoveries, they account for a significant proportion of job growth in the economy, even though their share of overall employment is quite small. Therefore, even modest slowdowns in start-up growth could result in significant drops in overall employment growth. 
Employment at start-ups was particularly hard-hit during the Great Recession, suffering a much steeper decline in growth compared with more mature businesses and compared with start-ups in previous recessions. One issue may have been financing. Because personal assets are an important source of funding for start-ups, the tumble in house prices during the downturn may have weakened start-up activity. Since house prices remained depressed early in the recovery, this Economic Letter examines whether start-up employment growth also remained depressed. We further consider whether the slower growth may have been a significant factor behind the weak job recovery. 
We show that, compared with the recovery from the deep downturn of 1981–82, start-up employment grew significantly less in the year following the Great Recession. Our analysis suggests that between March 2010 and March 2011, lower employment growth at start-ups may have subtracted as much as 0.7 percentage point from total job growth, translating into roughly 760,000 fewer jobs. 
Despite the weakness thus far in the recovery, recent increases in home values may bring better news, translating into greater financing opportunities for start-ups and, in turn, contributing to faster employment growth. ...

    Posted by on Tuesday, July 8, 2014 at 12:24 AM in Economics | Permalink  Comments (4)

          


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