Constanza S. Liborio

Juan M. Sánchez

English

Research Papers in Economics

14   The Regional Economist  |  January 2012
T
he opening of new businesses is funda-
mental for U.S. employment growth.  
Businesses, small and large and of different 
ages, are constantly creating and destroying 
jobs.  Profitable businesses stay in the market 
and expand, while the less-successful ones 
must consider downsizing or closing.  These 
decisions, in turn, have a direct impact on 
the labor market.  Amidst this job churn, it’s 
important to remember that new businesses 
are the key to net job creation. 
To illustrate the importance of startups, it 
is useful to consider a 2009 study that used 
data from the Business Dynamics Statistics 
(BDS), an annual series of data from the U.S. 
Census Bureau.  The researchers found that, 
on average in 1980-2005, private-sector 
startup employment accounted for 3 percent 
of the overall employment every year.
1  This 
may seem like a small fraction, but it becomes 
substantial when compared with the 1.8 
percent average annual net employment 
growth during the same period.
2  Similarly, 
researchers showed in another 2009 study 
that the youngest firms (less than 5 years 
old) accounted for almost the entire net job 
creation in 1980-2005.
3  
Examining the behavior of current 
business openings seems important to 
understanding the progress of employment 
recovery after the Great Recession.  This will 
be the focus of this article. 
Startups and the Business Cycle
Smaller firms—which are most likely 
younger as well
4—are found to be less 
sensitive than large ones to business cycle 
conditions.  A recent study found that in 
recessions prior to 2007, small businesses 
contracted slower during recessions and 
expanded faster during recoveries compared 
with large businesses, thus leading employ-
ment out of the recession.  However, the 
same paper, using more-recent Business 
Employment Dynamics (BED) data, shows 
the opposite behaviors during the Great 
Recession.  Small firms were more affected 
than large firms in terms of job creation and 
destruction.
5 
The last recession and the current 
recovery, thus, present special episodes to 
examine.  Startup formation experienced a 
substantial decline up to the third quarter 
of 2009, according to BED data, which are 
published quarterly by the Bureau of Labor 
Statistics.  By the beginning of 2010, the 
number of businesses exiting the market 
returned to prerecession levels, but the entry 
of new businesses still lagged behind. 
The experience of business births and 
deaths varied across the U.S.  Some regions 
faced little recovery, while other areas 
experienced growth in startups.  The avail-
ability of state-level data on job creation and 
destruction allows for a regional examina-
tion of the current recovery. 
Nation and District
BED data measure establishment births 
and deaths, as well as the subsequent cre-
ation and destruction of jobs.
6  Births and 
deaths of businesses do not include tem-
porary shutdowns or seasonal reopenings.  
Thus, a business must be closed for a year to 
be considered as a death and not a tempo-
rary shutdown.  This, in turn, restricts the 
availability of business death data up to the 
beginning of 2010.  Historically, the level of 
business births has been greater than deaths 
during economic recoveries.  After the Great 
Recession, however, this process has been 
delayed by the slower growth of startups.
Figure 1 displays business births and 
deaths for the nation and the Eighth Dis-
trict.
7  They are normalized so that the peak 
previous to the Great Recession is equal to 
100.  The main message to take away is that 
the Eighth District behaves similarly to the 
nation, with startup growth in the District 
being slightly higher.  This is reasonable since 
the District’s states account for a substantial 
amount of national business births—about 
11.6 percent—and deaths—11.9 percent. 
By 2010:Q1, business deaths fell to prere-
cession levels for both the nation and the Dis-
trict.  Slow business formation, however, has 
delayed the closing of the gap between estab-
lishments’ exit and entry levels.  In 2010:Q4, 
for the nation and the District, startup levels 
were still 6.2 percent and 2.4 percent below 
the prerecession peak, respectively. 
Job creation and destruction have varied 
across states.  Figure 2 displays the relative  
degrees of recovery of each state in the 
Eighth District as measured by establishment 
creation and destruction (represented by red 
circles), as well as job creation by new busi-
nesses and job destruction by businesses that 
have shut down (represented by blue squares).   
The horizontal axis shows the percent change 
from 2007:Q4 to 2010:Q1 of business forma-
tion and the employment generated by those 
startups.  Thus, a state with positive business 
openings and positive employment creation 
will have recovered in startup creation 
activity.  The vertical axis shows the percent 
change of business deaths and the subse-
quent employment destruction during the 
same period.  With this structure in mind, 
states located in the lower-right quadrant 
experienced full recovery, while states in the 
upper-left quadrant displayed no signs of 
recovery.  States in the other two quadrants 
Starting a Business  
During a Recovery:  
This Time, It’s Different
By Constanza S. Liborio and Juan M. Sánchez
entrepreneurs
©Getty imaGes/John anthony Rizzoexhibited partial recovery in either business 
births or deaths.
Based on these measures, the main finding 
is that the great majority of states in the District 
have been in a partial recovery stage.  In these 
states, business deaths are back to prerecession 
levels, but there is still little startup growth.  
Similarly, jobs destroyed by shutdowns are back 
to prerecession levels, but there is still weak 
employment creation from startups.  Among 
these states, Kentucky, Tennessee, Arkansas, 
Mississippi and Indiana are experiencing 
a slower recovery in terms of employment 
creation than in terms of startup creation. 
Meanwhile, Missouri experienced a 
decrease of 18.4 percent in employment 
created by startup openings and an increase 
of 25.6 percent in employment destroyed by 
business deaths.  This means that this state 
was actually worse off in 2010:Q1 than at the 
beginning of the recession in employment 
creation and destruction. 
Illinois displays partial recovery for 
employment dynamics but no recovery in 
terms of business entry and exit.  Although 
there was a decrease in employment 
destruction, there still was a slow recovery 
of business exit levels in this state.  Up until 
2010:Q1, no state in the Eighth District had 
reached full recovery. 
Is the asymmetric behavior of entry and 
exit of businesses described above a symp-
tom of credit frictions?  Maybe.  If credit 
were scarce, new businesses and potential 
entrants would suffer more than existing 
firms.  While older establishments have 
had time to accumulate enough retained 
earnings, the startups rely more heavily on 
external finance (home equity lines, credit 
cards, etc.).  Another factor that may be 
affecting business entry levels is uncertainty.  
Incumbent establishments facing uncer-
tainty may stay in the market and reduce 
investment.  Instead, potential entrepre-
neurs may decide to postpone their decision 
of starting new businesses.  Whatever the 
reason for the slow recovery of establish-
ments’ births, the strong link between this 
variable and employment growth in previous 
recoveries suggests that the progress of 
startup entry must be closely followed to 
characterize the ongoing economic recovery 
of the District and the nation. 
Figure 1 shows establishment births and deaths normalized so that 2007:Q4=100.  the eighth District data reflect totals 
for the entire seven states in the District, even though parts of some states are actually in other Federal Reserve districts.  
Figure 2 displays the relative recovery of eighth 
District states in terms of establishment births 
and deaths (red circles) and their subsequent 
employment creation and destruction (blue 
squares).  Percent change was calculated since 
the peak of the recession, 2007:Q4, to 2010:Q1. 
ENDNOTES
 1 See Haltiwanger et al. 2009.
 2 This analysis considers just the U.S. private sector. 
 3 See Stangler and Litan. 
 4 Evidence of this can be found in Business Dynamics 
Statistics data, U.S. Census Bureau.
 5 The authors of the paper defined small firms as those 
with fewer than 50 employees and large firms as  
those with more than 1,000 employees.
 6 Births are establishments either with positive 
employment for the first time in the current quarter 
and with no links to the previous quarter or with 
positive employment in the current quarter following 
zero employment in the previous four consecutive 
quarters.  Deaths are defined as establishments with 
no employment or zero employment reported for four 
consecutive quarters following the last quarter with 
positive employment.  Births are a subset of openings, 
and deaths are a subset of closings.  They do not  
include reopenings of seasonal businesses or tempo-
rary shutdowns. 
 7 District is defined as the sum of the Eighth District 
states.  Throughout this analysis, states are consid-
ered as a whole.  Thus, some regions analyzed here 
are part of neighboring Federal Reserve districts 
since district borders don’t always coincide with state 
borders.  See District map on Page 16.
REFERENCES
Haltiwanger, John C.; Jarmin, Ron S.; and Miranda,  
Javier.  “Who Creates Jobs?  Small vs. Large vs. 
Young.”  National Bureau of Economic Research 
Working Paper No. 16300, August 2010.  See www.
nber.org/papers/w16300
Haltiwanger, John C.; Jarmin, Ron S.; and Miranda, 
Javier.  “Jobs Created from Business Startups in the 
United States.”  Kauffman Foundation Research  
Series, January 2009.  See www.kauffman.org/ 
uploadedFiles/BDS_Jobs_Created_011209b.pdf
Kane, Tim.  “The Importance of Startups in Job Creation 
and Destruction,” Kauffman Foundation Research 
Series.  July 2010.  See www.kauffman.org/uploaded-
Files/firm_formation_importance_of_startups.pdf
Moscarini, Giuseppe; and Postel-Vinay, Fabien.  “Large  
Employers Are More Cyclically Sensitive.”  National  
Bureau of Economic Research Working Paper No. 
14740, February 2009.  See www.nber.org/papers/w14740
Stangler, Dane; and Litan, Robert.  “Where Will the 
Jobs Come From?”  Kauffman Foundation Research 
Series, November 2009.  See www.kauffman.org/ 
uploadedfiles/where_will_the_jobs_come_from.pdf
2
0
0
7
:
Q
3
2
0
0
7
:
Q
4
2
0
0
8
:
Q
1
2
0
0
8
:
Q
2
2
0
0
8
:
Q
3
2
0
0
8
:
Q
4
2
0
0
9
:
Q
1
2
0
0
9
:
Q
2
2
0
0
9
:
Q
3
2
0
0
9
:
Q
4
2
0
1
0
:
Q
1
2
0
1
0
:
Q
2
2
0
1
0
:
Q
3
2
0
1
0
:
Q
4
120
110
100
90
80
70
60
U.S. Establishment Deaths
I
N
D
E
X
,
 
2
0
0
7
:
Q
4
=
1
0
0
U.S. Establishment Births
District Establishment Deaths
District Establishment Births
souRce: Business employment Dynamics (BeD), Bureau of Labor statistics (BLs).  Last observation: 2010:Q4 for establishment births and 
2010:Q1 for establishment deaths.
Business Deaths and Births
Figure 1
The Regional Economist  |  www.stlouisfed.org   15
souRces: Business employment Dynamics, 
Bureau of Labor statistics.
Percent Change since Start of Recession
Figure 2
MO
IL
AR TN
KY AR
KY
TN
MO IN
IN
IL
50
40
30
20
10
0
–10
–20
–30
–40
–50
No Recovery Births Recovery
Full Recovery Deaths Recovery
–45 –30 –15 0 15 30 45
Percent Change in Business Births/Employment Created by Births
MS
MS
P
e
r
c
e
n
t
 
C
h
a
n
g
e
 
i
n
 
B
u
s
i
n
e
s
s
 
D
e
a
t
h
s
/
E
m
p
l
o
y
m
e
n
t
 
D
e
s
t
r
o
y
e
d
 
b
y
 
D
e
a
t
h
s
Employment       Establishments
Juan Sánchez is an economist and Constanza 
Liborio is a research associate, both at the 
Federal Reserve Bank of St. Louis.  See http://
research.stlouisfed.org/econ/sanchez/ for more 
on Sánchez’s work.

See www. nber.org/papers/w16300

Starting a business during a recovery: this time, it's different

http://stlouisfed.org/publications/pub_assets/pdf/re/2012/a/entrepreneurs.pdf

Starting a business during a recovery: this time, it's different

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics