Tough Labor Markets Tied to Startups of Smallest Firms, Study Finds
Release Date: Tuesday, December 15, 2009

WASHINGTON, D.C. – Much has been said about small employers of up to 500 workers, but little is known about the three-quarters of firms in the economy that are “nonemployers,” generating full- or part-time work for their owners. A new study examines basic statistics about the entry and exit of these very small firms. In contrast to employer firms, which often start as a response to an economic opportunity in the marketplace, nonemployer firms are often started as an occupational decision.

“Nonemployers represent the largest but possibly least understood segment of the business population,” said Susan M. Walthall, Acting Chief Counsel for Advocacy. “Their numbers show that they make significant economic contributions, so it is important that the role of these very small businesses be understood.”

The paper issued today, The Nonemployer Startup Puzzle by Zoltan Acs, Brian Headd, and Hezekiah Agwara, uses special tabulations produced by the U.S. Census Bureau’s Nonemployer Statistics and funded by the U.S. Small Business Administration, Office of Advocacy. For data years 2002-2004, the Census Bureau matched nonemployers across years to determine entry and exit by major industry and state. Among the findings are the following:

· Nonemployer firms have entry rates about three times those of employer firms. Of existing companies in 2004, 34.3 percent of nonemployers were new and 12.6 percent of employers were new.

· Exit rates in the time period studied were lower but similar to entry rate levels for both nonemployers and employers.

· Entry and exit rates, collectively referred to as turnover, seem to be associated with an industry’s economies of scale, or the amount of capital needed for entry. For example, mining, with high economies of scale, had low turnover rates, while services, with low economies of scale, had high turnover rates.

· The econometric model found, after controlling for population growth, that states’ unemployment rates were positively correlated with nonemployer entry.

For a copy of the paper, visit the Office of Advocacy website at www.sba.gov/advo.

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The Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The presidentially appointed Chief Counsel for Advocacy advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policymakers. For more information, call (202) 205-6533.