09/14/2012 01:35 pm ET Updated Sep 15, 2012

Hudson Institute Report Shows Massive Drop In Startup Jobs, 'Like Nothing We Have Seen'

The number of jobs created by startup companies in the U.S. is dropping at an alarming rate, according to a new study by the Hudson Institute.

The study, which draws on government data, finds that more than three years after the end of the recession in 2009, when job creation at new firms hit an all-time low, the number of startup jobs in America has continued to plummet.

“The state of entrepreneurship is, sadly, weaker than ever,” writes the paper’s author, Tim Kane, chief economist at the Hudson Institute, a conservative Washington, D.C. think-tank. “The rate of startup jobs during 2010 and 2011, years that were technically in full recovery, are the lowest on record.”

The findings contrast the torrent of startup success stories broadcast by the media in the aftermath of the recession. From Silicon Valley to Silicon Alley, and in entrepreneurial hubs across the nation, founders and venture capitalists have said they’ve observed rising levels of company creation as the fixed costs of launching a business fall to historic lows. But globalization and technology -- which have made starting a company easier and cheaper than ever -- appear to have also made it more difficult than ever for U.S. workers to land jobs at new firms, Kane’s study suggests.

The number of jobs created by establishments less than one-year-old decreased to an all-time low of 2.8 million in 2009 from 4.1 million in 1994, according to Bureau of Labor Statistics data cited in the report. Then, in 2010, the number of startup jobs fell even further to 2.5 million. The plunge is unprecedented, Kane said in an interview with HuffPost.

“Yes this has been the most severe recession,” he noted. “You might say it’s been, say, twice as bad as some of the previous recessions. But what you’re seeing in startup jobs is much more than a twice-as-bad drop. It's like nothing in the data series we have seen.”

In many ways, Kane said, the figures are puzzling. The capital requirements to start a business are phenomenally low. “You don’t need to get a multi-million dollar loan to buy factory equipment, or open a new shop on Main Street. You can start an internet business for, what, ten dollars?” he added. “We should be seeing a trend going the other way.”

Part of the answer for why low startup costs have failed to spur startup jobs in the U.S. may be that the relentless drive for efficiency through outsourcing work overseas or technology has allowed new firms to get the same amount of work done, but with fewer workers.

Robert Litan, a former colleague of Kane’s at the Kauffman Foundation, an entrepreneurship advocacy group, identified this trend in a report released last year called, “Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation.”

He found that even before the Great Recession, new firms were starting smaller. “They were opening their doors with fewer workers than the historic norm and were relatively reluctant to expand their workforces even during good economic times,” Litan wrote. “Since at least the middle of the last decade and perhaps earlier,” new firms have contributed “fewer and fewer new jobs to the economy.”

Kane said that Litan’s findings mesh with his own, and that globalization is partly to blame. “The venture capital industry expects every startup now to have an international strategy. Not just for sales, but for putting their team together.”

“It’s just too easy for startup companies now to outsource some of their work as efficiently as they can, and if that means hiring people who aren’t Americans and whom they don’t have to pay taxes on and provide health benefits to, than we’re feeling the effects of that as a country.”

Kane suggests in his paper that the U.S. government could reduce globalization's negative effect on startup jobs by reducing the amount of taxes and benefits that new firms must pay for an American hire.

Felix Salmon at Reuters says he doesn’t buy it. And while Salmon finds the figures cited by Kane to be startling, he also notes that the percentage of Americans working at startups at its peak was only a little more than one percent of the population. Now, since the recession ended, that percentage has dropped to around .78 percent.

“Concentrating on startups is not going to move the broader employment needle very much,” he writes, adding, though, that “the dynamic here is surprising and troubling, all the same.”



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