With unemployment at stubbornly high levels, Washington’s attention is focused on job creation. Recent research has shown that the formation of businesses is the source of much net job creation, according to a story at BusinessWeek.
But when discussing job creation by entrepreneurs, most observers focus on successful new businesses, assuming that most jobs are created from the growth of the best-performing startups.
What’s often overlooked is the fact that soon-to-be-unsuccessful entrepreneurs create even more jobs than their luckier counterparts.
Just over half of all new businesses are gone by their fifth birthday. Those failures produce more net new jobs as part of the formation process than the ones that survive.
Census data from the latest available cohort—those businesses founded in 2000—show that businesses that didn’t make it until 2005 created 1,611,177 net new jobs when they were started, whereas the businesses that did survive until 2005 created 1,475,331 net new jobs in their start year.
That is, 52 percent of the net new jobs created through formation were in the businesses that would fail within five years, and 48 percent were created in businesses that would survive.
If most of the net new jobs in the economy are created by entrepreneurs forming new businesses and the majority of those jobs are produced by entrepreneurs whose businesses don’t survive five years, then the act of business creation by unsuccessful entrepreneurs is a key part of how our economy creates new jobs.
To have the kind of net job creation that would bring down our currently high unemployment rate, many soon-to-be-unsuccessful entrepreneurs need to start businesses.
Photo by digitaldividecomputing.