Businesses started out of necessity might not generate jobs: Kauffman report

Filed under Economy, Management, News, Workplace

 The Great Recession produced more entrepreneurs than at any time during the past 15 years, but most haven’t yet generated jobs, according to a new study by the Kansas City, Mo.-based Kauffman Foundation.

The foundation’s Index of Entrepreneurial Activity suggests about 34 out of 10,000 adults — or about 565,000 people — started businesses each month in 2010 throughout the United States,  about the same number as during 2009 but up from 30 out of 10,000 in 2007, said Rob Fairlie, professor of economics at the University of California at Santa Cruz, who is the author of the report. In Chicago, about 29 out of 10,000 adults started businesses in 2010, slightly less than the national average, Fairlie said. Areas with new population growth and large immigrant populations tended to create the most businesses, the data suggests.

While small businesses often are credited for being the first to generate jobs after a downturn, Fairlie said, many of the newest firms are sole proprietorships created by people who lost a job and couldn’t find another or who saw their current employment position as having limited opportunity for advancement.

New employer business rate drops

As a result, the portion of businesses employing workers dropped to 10 out of 10,000 companies in 2010 from 13 out of 10,000 companies in 2007.

The difficult economy likely convinced many new small business owners to hold off on permanent hires, Fairlie said. “Is this the best time to start a firm with employees? Probably not,” he said, because of limited demand for products and services.

Starting a business solo carries less risk, he said.  Many businesses started during a recession are created out of necessity and might close when their founders find full-time employment. But others will turn out to be successful businesses and generate jobs in the future, Fairlie said.

Virtual firms spring up

At the same time, technology has made it easier and less expensive for individuals to go into business for themselves, Fairlie noted. “People are creating virtual firms,” he said. While virtual firms might be less likely to produce full-time jobs, they are creating work. “It’s not clear that it’s all bad,” Fairlie noted.

Populations that likely experienced the greatest difficulty in finding new, comparable employment after losing a job tended to have entrepreneurial rates higher than the overall average, the report suggests. And many people starting businesses recently have more than a decade of work experience.

Older workers try entrepreneurship

Looking at age patterns, the report indicates entrepreneurship growth was highest among those ages 35 to 44, increasing to 0.40 percent in 2009 from 0.35 percent in 2008. The entrepreneurial activity rate for those 55 to 64 also surpassed the average, climbing to 0.40 percent in 2009 from 0.35 percent in 2008, the report indicated.

In addition, entrepreneurial activity among immigrants rose to 0.62 percent in 2010 from 0.51 percent in 2009, while declining slightly for U.S.-born citizens. This reflects that during a tough job market, immigrants are likely to see entrepreneurship as their best option, Fairlie said.

“Immigrants face a lot of obstacles in the labor market, so they turn to starting a business,” he said.

 — Ann Meyer with Hallie Busta

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