US startups are on the decline, and it's terrible news for the economy


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A closed retail store is viewed in Manhattan.

Despite the hype surrounding tech "unicorns" - the myriad of startups that are valued at over $1 billion - the number of entrepreneurial endeavors in the US has actually been declining for some time now.


According to researchers, not only are there now fewer startups being created in the US, but the slowing rate of entrepreneurship is hurting the economy.

"Historically, the U.S. has exhibited a high pace of entrepreneurship with a small share of fast growing young firms disproportionately accounting for job creation and productivity growth," said the new study. "The decline in startups and the accompanying decline in high growth young firms either suggests adverse consequences for U.S. economic growth or a change in the way that such growth will be achieved."

The researchers - Ryan Decker of the Federal Reserve, Ron Jarmin and Javier Miranda of the US Census Bureau, and John Haltiwanger of the University of Maryland - analyzed the rate at which startups are adding employees and found that the number of high-growth firms has decreased significantly.

"In 1999, a firm at the 90th percentile of the employment growth rate distribution grew about 31 percent faster than the median firm. Moreover, the 90-50 differential was 16 percent larger than the 50-10 differential reflecting the positive skewness of the employment growth rate distribution," said the study.


"By 2007, the 90-50 differential was only 4 percent larger than the 50-10, and it continued to exhibit a trend decline through 2011."

Essentially, there has always been a large number of startups in the US. Of those startups, a select few are able to catch on and heat up quickly. These firms hired a disproportionate number of people, helping to stimulate the labor market.

Over the past 15 years, not only have there been fewer startups overall said the study, but a smaller number have been able to transform into high growth companies.

This is also an issue for the broader US economy since these companies also carry the load for the economy in terms of new hiring and increasing productivity, which has been stagnant in recent years.

"Evidence suggests that young firms devote disproportionately more resources to innovation, so the high growth of young firms is particularly important for aggregate productivity growth," wrote the researchers. "If rapid firm-level growth reflects efficient movement of labor toward high-productivity producers, then reductions in the number and impact of such firms may be a cause for concern."


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Decker, Haltiwanger, Jarmin, and Miranda/NBER

While the researchers didn't empirically dive into the reasons behind the slowing pace of startup hiring growth, they did provide possible answers.

  1. Startups don't know how big they should be. Either through regulation or distorted markets, firms aren't sure if they are ready to take on more employees.
  2. Startups are prioritizing other forms of growth besides adding employees. The researchers suggest that young companies could be buying machines or expanding internationally. Additionally, they may find it more profitable to be acquired by larger, mature businesses.

This is troubling, said the researchers, because the US economy has for so long been supported by these high-growth entrepreneurial firms and without them, the country's future growth prospects could be limited.

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