Why Has Job Growth Been So Slow? Fewer New Businesses

The rate of job creation over the past three years has been disappointing.  The Obama administration touts the fact that private sector employment has increased for 29 straight months.  But since February of 2010, when employment started to rebound, we have added 138,000 jobs per month (an annual growth rate of 1.27%).  Both parties agree that this is insufficient given the depth of the recession and the millions of unemployed, underemployed and discouraged workers in our economy.  An important reason for the disappointing growth in jobs is the slowdown in job creation from start-ups and new establishments.  The U.S. economy would create 2.65 million more jobs per year if new businesses were creating jobs at the same rate as in the 1990’s.

In 2011, for the first time in the 20 years that the Bureau of Labor Statistics has maintained these data, the number of jobs created at new establishments dropped below 5 million.  Job growth from newly formed establishments has declined by 38% since 1998, relative to total private sector employment.  In 2011 jobs created in new establishments accounted for 4.6% of private sector employment compared to 7.4%  of employment in 1998.  The decline in the share of jobs from new establishments has been steady over the past decade as shown by the following graph:

The dearth of start-ups is an important factor in understanding the anemic job growth in this recovery.  If new establishments were being formed at the same rate as in the 1990’s, the U.S. economy would be creating 221,000 more jobs per month (2.65 million more jobs per year).  Job creation would be 160% higher if job gains from new enterprises returned to the rates experienced in the 1990’s.

It is not clear why job growth from new establishments has dropped steadily over the past decade.  It is possible that each new business venture today creates fewer jobs in the U.S. due to outsourcing and technological change.  Regardless of the causes, job growth will not be robust as long as start-ups create fewer and fewer new jobs each year.  Changes in tax policy and regulations to create a business environment amenable for new businesses, that have historically been the engine of job creation, could help reverse this trend.