RESEARCH TRIANGLE PARK – A new working paper from the Kauffman Foundation finds that newly launched startups continue to create new jobs even in times of recession.

The study looks at data from employer startups less than one year old and employer firms one year and older, as well as younger employer firms compared to older employer firms. The bottom line: During the prior four recessionary periods in the United States, startup job creation appeared uncorrelated with these economic downturns.

“Startup net job growth is not impacted during economic downturns or recessions because new firms haven’t yet shed or destroyed jobs,” said Thom Ruhe, president and CEO of NC IDEA, commenting on the study in an interview with WRAL TechWire.  “Typically all they do in their first year of existence is hire folks; namely create jobs.”

There’s an important question as to what happens in these same firms — the startups that were less than one year old during recessionary periods – when they become young firms, in years 2, 3, 4, or 5, said Ruhe.

“The effects of the COVID-19 pandemic are being closely monitored, and what happens to employer businesses during and after this downturn is an important part of the recovery,” the Kauffman website announcing and summarizing the working paper reads.  “Research shows that employer startups have accounted for substantial net new job creation.”

Nationally, the rate of new entrepreneurship is the highest it’s been in 25 years, an earlier Kauffman report found, noting that 380 people of every 100,000 adults became new entrepreneurs in any given month of 2020.

Many of those firms started in North Carolina, according to filings with the North Carolina Secretary of State, and about 43,000 of them are considered “high-propensity” firms, meaning they are likely to hire additional employees, creating an average of about 5 jobs, according to data from NC IDEA shared with WRAL TechWire earlier in 2021.

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“North Carolina is also one of only nine states that surpassed 40,000 high-propensity firms created,” said Ruhe.  The U.S. Census Bureau defines a high-propensity business as a business that submits an application for an Employer Identification Number (EIN) through filings of IRS form SS-4 that, according to the agency, “have a high propensity of turning into businesses with payroll.”

In other words, said Ruhe, the formation of high-propensity businesses in the state is one important measure of future potential job growth due to entrepreneurship and new business formation.

It’s an area that policymakers could place their focus, said Ruhe, considering the needs of nascent, high-propensity firms that could experience sustainable growth and thus avoid job destruction in later years or when there is a future economic downturn or recession.

Two areas to consider, according to Ruhe: access to talent and access to capital.

Even more than available financing, whether through grants, loans, or early-stage investment capital, there’s likely to be a critical shortage of people with the specific skills and experience that are typically needed for early employees of startups and younger firms, said Ruhe.

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The Kauffman paper found that the number of firms in existence fluctuates with the business cycles, and the number of older employer firms has been increasing over time, whereas there is not a discernible upward trend in the number of startups of younger firms. Once a firm reaches five years, it is more likely to continue to exist, and persist, through recessionary periods, even if the firm sheds jobs during those periods, compared to younger firms or startups.

After recessionary periods, Kauffman says, net job creation does tend to rebound, though it takes time.  Yet the total number of younger firms and startups does not necessarily return to pre-recession levels along the same timeline.

The data that Kauffman studies is from the BDS REST API. Employer startups are defined by BDS as firms in their first year. Data from the underlying sources was pulled on February 22, 2021. Recession periods are specified by the National Bureau of Economic Research.