As if last week’s employment report wasn’t pessimistic enough, a new Kauffman Foundation paper raises the possibility that the long-awaited recovery of lost jobs may take longer than we hoped, in part because startups are not performing at their historic norm.

As has been well-established, net job creation in the United States over the past three decades has mostly been driven by new and young companies. High levels of gross job creation and destruction at older and larger companies tend to cancel each other out, and the net additional increment of new jobs each year emerges mainly from younger firms. This is due, in no small part, to their sheer volume–there are simply more new and young firms.

In their paper, Starting Smaller, Staying Smaller, Kauffman researchers E.J. Reedy and Bob Litan highlight a “slow leak in job creation” in the United States. Part of this is a reduction in volume–not surprisingly, the annual number of new employer firms (i.e., those that have employees aside from the founder) fell from 2007 to 2009. Fewer new firms means fewer new jobs, which means a reduction in net job creation.

It gets worse, however: there is ”a longer-term trend that began earlier in the decade.” Even before the onset of the Great Recession in late 2007, new companies were “starting smaller”–creating fewer jobs upon entry. And, once in existence, startups over the last decade have been “staying smaller”–creating fewer jobs in their first years of existence. Hence, a slow-motion jobs leak. As a result:

The relatively restrained job creation of new businesses in recent years will, therefore, have a substantial negative impact on longer-term employment levels.

In other words, we are going to be living with these consequences for a considerable amount of time. This is reminiscent of Tyler Cowen’s argument in his recent book, The Great Stagnation.

To some observers, some of this will not be surprising. The economic expansion from 2002 to 2007 was one of the worst on record, with earnings growth and job creation lagging behind those of nearly every other expansion since 1948. Most notoriously, the employment-to-population ratio barely moved, a symptom of weak growth; the ratio plunged further during the recession and now stands at its lowest level in 28 years. The lackluster job performance of new firms during this period is thus one culprit behind poor economic performance.

So why is this happening? As the paper points out, there are probably too many factors at work to fully disentangle. One persuasive explanation might be the nature of economic growth over the past decade, particularly before the recession. As we all know, the housing bubble and its related financial legerdemain distorted large parts of the economy, from unsustainable construction to massive numbers of people moving to Las Vegas.

One thesis that might be advanced, then, is that the housing and finance bubbles (only one of which popped) also distorted entrepreneurship, prompting large numbers of people to start what were basically unhealthy firms right from the beginning. Our Kauffman colleague Paul Kedrosky has recently been giving a presentation on the number of ladders picked up by the California Highway Patrol as highway debris. Ladder debris climbed steadily from 2001 and peaked in 2006; thereafter, it plummeted. How is this relevant? As Paul tells it, ladders that were marginally attached to trucks likely indicate contractors who were marginally attached to construction–the housing bubble meant a flood of new people and companies into construction, further distorting the market.

Now, obviously, highway debris cannot totally explain the “starting smaller, staying smaller” phenomenon discussed by Reedy and Litan. But, it is likely the combination of several factors just like this–small distortions that inflated far beyond healthy levels–that lurks beneath the subpar startup trends. In any case, whatever the reason, the United States must find a way to reinvigorate its entrepreneurial sector, the most vital source of long-term economic health.

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