Startups Making Do with Fewer Workers, Kauffman Study Shows

7/11/11

Has the air gone out of the American economy? That’s the troubling suggestion of a new study showing how, even before the current downturn, fewer new firms were being formed and those that did open for business were hiring fewer workers.

Titled “Starting Smaller, Staying Smaller: America’s Slow Leak in Job Creation,” the report looks at the entire gamut of new companies and not just high-tech startups.

But Dane Stangler, research director for the Kauffman Foundation of Kansas City, MO, which produced the study, says technology firms exemplify these hiring practices because they are most familiar with the productivity tools that let employers get more work done with lower headcounts.

“Clearly technology is at play because you need fewer people to run a company nowadays,” Stangler says. “And one of the most prominent places you see that is in the tech sector.”

The new findings have nationwide significance because previous studies by the Kauffman Foundation, which specializes in research about the entrepreneurial sector, have shown that job creation in the United States is essentially driven by new companies.

“Historically, startups are the key to long-term employment growth, and they have been hiring fewer people over the last several years,” study co-author Robert Litan said in a statement today.

During the 1990s, for instance, the average new business establishment opened its doors with about 7.5 employees—compared to about 4.9 jobs per startup today, the report said.

Moreover, the number of new businesses that hire employees has contracted by more than 27 percent since 2006, according to the study. So not only are there fewer employees per new company, but there are fewer new companies making any hires at all.

The net result is a persistently high unemployment rate, despite the fact that the recession technically ended two years ago. “We won’t fix our core unemployment problem in the United States until young businesses get back on track,” Litan said.

One potentially hopeful finding in the otherwise discouraging study was the fact that larger numbers of Americans were going into business as freelancers or contractors. Stangler says some of these one-person shops could become employers in the future.

“Call them necessity entrepreneurs if you will, but some of those people—how many we can’t predict—could drive future job growth,” he says.

Tom Abate is a freelance writer in the San Francisco Bay Area who has covered science, high-tech, biotech, and economics. Follow @

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