The decline of job creation at new establishments

“Creative destruction” is often said to be one of the main drivers of economic growth.¹ New businesses, innovative ideas, and modern technology replace outdated processes and production to support healthy economic systems. Similarly, the creation and destruction of businesses and jobs provided by those businesses facilitate robust and resilient labor markets. The U.S. Bureau of Labor Statistics (BLS) Business Employment Dynamics (BED) data can help us to understand these economic flows; these longitudinal data series, which track the same information for the same subjects over an extended period, are used to study trends in net new business formation, the average size of startup businesses, and the employment levels of businesses at various stages of survival. The data bring to light changes in creative destruction and labor dynamics over the last three decades.

This Beyond the Numbers article highlights the BED establishment birth and death statistics and establishment age and survival data from 1992 to 2022. BLS data reveal that while the number of new establishments created each quarter has increased over time, the number of jobs generated by these establishment births has fallen steadily since the late 1990s. In combination, these trends suggest that the average establishment birth today employs half as many people as establishment births 30 years ago. Read on to discover more about these important data series and for an in-depth analysis of employment at new businesses.

Business Employment Dynamics sources and scope

The Business Employment Dynamics (BED) data are derived from the BLS Business Register, which contains establishment level data from all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands.² These data are collected quarterly per unemployment insurance (UI) reporting requirements and contain monthly employment and quarterly wages paid at the establishment level along with several other data elements. Nearly 97 percent of U.S. non-farm employment is subject to UI reporting; therefore, the Business Register is a near census of employment across U.S. establishments. In 2021, the Business Register contained data on 143.8 million employees earning $9.7 trillion in wages across 10.9 million establishments.³

The BED program links Business Register records across time to create a quarterly longitudinal database to study employment dynamics. BED publishes statistics on gross job gains and gross job losses, as well as their components. Gross job gains result from the expansion or opening of establishments, while gross job losses result from the contraction or closing of establishments. BED reporting of establishment expansions, openings, contractions, and closings, along with their resulting job gains and losses, provides the most timely and accurate information on job creation and destruction in the U.S. economy.

BED leverages the longitudinal structure of its database to subset openings into two distinct categories. Establishments opening for the first time are called establishment births. These establishments differ from those businesses that are reopening after one or more quarters of closure. Similarly, establishment closings can be categorized as either establishments that have permanently closed their doors, called establishment deaths, or those that temporarily closed but subsequently reopened.

Establishment births and deaths, and the jobs they create and destroy are small in relation to overall gross job gains and losses. For example, of the 2.4 million establishments that gained jobs in the third quarter of 2021, only 359,000 of these establishments opened for the first time as establishment births. In the same quarter, only 245,000 of the 2.1 million establishments that lost employment were establishment deaths. Between 1992 and 2022, establishment births accounted for an average of 11.8 percent of establishments gaining jobs each quarter, and establishment deaths averaged 10.7 percent of establishments losing jobs.

Establishment births and deaths are important for economic health

While establishment births and deaths claim relatively small proportions of gross job gains and losses, they play important roles in maintaining the health of the economy. For example, establishment births drive employment growth in the total private sector; in the year ended March 2019, startups—that is, firms or establishments that are less than a year old—accounted for 90 percent of employment growth in the U.S. economy.⁴

Not only do startups strongly impact labor growth, but establishment births and deaths also impact productivity growth. Researchers find that productivity growth is highest at the time of establishment birth and flattens as the business ages.⁵ Without those births, productivity growth is repressed; it is estimated that the decline in the number of startups in 2014 compared with the number in 1980 led to a 3.1 percent reduction in cumulative productivity in the aggregate U.S. economy.⁶ Establishment deaths also play a role in enhancing productivity. Less productive establishments are more likely to die, which creates opportunities for new businesses to enter and for existing, more productive establishments to expand.⁷

For workers, the turnover created by establishment births and deaths creates opportunities for job switching. Authors John Lettieri and Kenan Fikri suggest that an established culture of turnover prepares workers to adapt to major changes and eases the burden of economic disruptions such as recessions.⁸ In contrast, research shows that reduced fluidity in the labor market leads to lower employment rates, particularly for younger and less educated workers.⁹ Establishment births and deaths can also introduce competition that lessens local employer concentration, which is negatively related to wage levels.¹⁰, ¹¹ Job switching opportunities presented by establishment births and deaths increase wages for individuals and promote broader wage growth. ¹², ¹³

Quarterly establishment births and deaths have increased

BED data reveal that the number of establishment births and deaths each quarter has generally increased since the early 1990s. In the second quarter of 1993, 181,000 establishments were born. The number of establishment births recorded each quarter continued to grow through the remainder of the 1990s and into the 2000s. (See chart 1.)

While the 2001 recession had little impact on establishment births, the Great Recession suppressed the number of new establishments formed in the United States.¹⁴ Establishment births fell from 233,000 in the third quarter of 2007 to 192,000 in the third quarter of 2009. However, quarterly establishment births again increased in the recovery period, surpassing prerecession levels with 243,000 births in the third quarter of 2015 and rising.

The level of establishment deaths also increased throughout the 1990s. In the third quarter of 1992, approximately 154,000 establishments permanently closed their doors. Establishment deaths grew steadily through the 2001 recession, peaking at 219,000 in the third quarter of 2001, and fell again immediately following the recession. This cyclical behavior was again observed during the Great Recession when establishment deaths grew to 253,000 in the fourth quarter of 2008. Again, establishment deaths decreased following the end of the recession and then began to increase slowly during the recovery period.

Both establishment births and deaths reached unprecedented levels during the recession triggered by the COVID-19 pandemic. Establishment deaths reached a series high of 326,000 in the second quarter of 2020, as many businesses were forced to close their doors. This elevated level of establishment deaths was short-lived; by the third quarter of 2020, establishment deaths declined to 235,000. The number of establishment births fluctuated much more than deaths. In the four quarters prior to the recession, establishment births averaged 259,000 per quarter. In the second quarter of 2020, establishment births fell from 278,000 to 228,000. In the third quarter of 2020, establishment births again began to rise, and by the fourth quarter of 2021, establishment births set an all-time high, reaching a level of 379,000.

Net new business formations are largely positive

Net new business formations show strong cyclical patterns. For a given period, establishment births minus establishment deaths yield the level of net new business formation, indicating whether the creation of new businesses exceeds the destruction of existing businesses.

Prior to the 2001 recession, the U.S. economy added an average of 27,000 more establishments than it lost each quarter. (See chart 2.) The third quarter of 2001 was the first time in the history of the series in which more businesses died than were born. During this quarter, 219,000 establishments died, while 218,000 establishments were born. This period of negative business formation was short-lived and contained within the recessionary period. In fact, business formation returned to positive levels again prior to the official end of the 2001 recession and quickly recovered to prerecession levels.

Net new business formation remained positive until 2008. During the 2007–09 recession, net new business formation fell to levels never seen, highlighting the severity of the Great Recession. In the second quarter of 2009, there was a net loss of 50,000 establishments. This bout of negative net new business formation proved more persistent than in the previous recession; establishment deaths continued to outnumber births for a year following the end of the Great Recession.

As the economy recovered, the scales tipped once again so that there were consistently more quarterly establishment births than deaths. However, the second quarter of 2020 set a record low for net new business formation. During the 3 months that ended in June of 2020, 98,000 more establishments died than were born. Although this occurred in the quarter after the official end of the COVID-19 recession, this large decrease in net new business formation can be attributed to the economic effects of the pandemic. However, this period of negative net new business formation ended quickly, as establishment births outpaced deaths again by the third quarter of 2020.

Jobs created by establishment births and jobs destroyed by establishment deaths are both in decline

While the number of both quarterly establishment births and establishment deaths have increased over time, the number of jobs created and destroyed by those births and deaths are lower than in 1998. (See chart 3.)

At the start of the series in the second quarter of 1993, establishment births contributed nearly 1.1 million jobs to the U.S. economy. Establishment births continued to contribute an increasing number of new jobs to the economy through the remainder of the 1990s, reaching a series high of 1.4 million in the first quarter of 1998. However, employment from establishment births began to decline in the second quarter of 1998. This employment steadily decreased for almost a decade, showing a sharp decline during the Great Recession, and bottoming out at 706,000 in the first quarter of 2010.

Employment from establishment births was slow to recover after the Great Recession. At the end of 2019, establishment births added 905,000 new jobs to the economy. While this is a notable increase compared with the 2010 low, it is only two-thirds the level of the 1998 series high.

During the COVID-19 recession, employment from establishment births fell to a record low of 661,000 in the second quarter of 2020. However, employment from establishment births rebounded the next quarter, and in the most recent quarter of available data, the second quarter of 2022, establishment births added nearly 1.1 million jobs.

Jobs lost due to establishment deaths have also decreased in recent years compared to the 1990s. Jobs lost due to establishment deaths rose from 945,000 at the start of the series in the third quarter of 1992 to a series high of approximately 1.3 million in the first quarter of 2001. The series then declined until 2006. Jobs lost from establishment deaths rose slightly from 2006 through 2008 in response to the Great Recession and then declined again from 2009 to 2012. In the postrecession recovery, jobs lost due to establishment deaths began to rise in line with the increase in jobs gained from establishment births but never again approached the levels seen in the late 1990s.

The COVID-19 pandemic also impacted the trend of jobs lost due to establishment deaths. In the second quarter of 2020, approximately 1.2 million jobs were lost because of establishment deaths. This is almost one and a half times the number of jobs lost due to establishment deaths relative to the second quarter of 2020. While this spike in jobs lost seems extreme relative to recent history, it is interesting to note that this peak was still 14 percent lower than the level of jobs lost at the series high in 2001. Further, this elevated level of jobs lost was short-lived; by the third quarter of 2020, jobs lost due to establishment deaths fell back to levels seen before the pandemic, and in the first quarter of 2021, the series reached a record low of only 602,000 jobs lost via establishment deaths.

Average “birth weight” has declined: new businesses are opening with fewer employees

The increasing number of establishment births in combination with the decreasing number of jobs generated by those births suggests that the average size of new businesses has been shrinking in recent decades. This theory can be examined through a measure informally nicknamed “birth weight,” that is calculated as the level of gross job gains from establishment births divided by the level of establishment births. While number of new business establishments tends to rise and fall with the business cycle of the overall economy, the decline in jobs created by establishment births raises questions regarding the changing nature of startups.

The average “birth weight” has been steadily declining over the last 20 years from a high of 6.4 employees per establishment birth in 1996 to a low of 2.7 employees per establishment birth in 2021. (See chart 4.) Based on this data, newborn establishments on average are much smaller now than 20 years ago; today’s average establishment birth creates about 40 percent of the jobs it would have created in the 1990s.

The phenomenon of the shrinking establishment birth weight is even more notable when coupled with the fact that, as discussed above, establishment births drive net job gains. The only establishment age category that consistently creates more jobs than it loses is the category of establishments less than 1 year old.¹⁵ For every year on record except 2022, net job flows summed across all existing businesses resulted in net employment losses.¹⁶ However, in all but 5 years over the nearly 30-year history of the series, the jobs created by establishment births more than offset the net job loss at existing establishments and resulted in a yearly net employment gain for the economy as a whole.

Businesses are employing fewer people at 1, 3, and 5 year survival milestones

Not only is the average “birth weight” lower now than it was in the 1990s, but also establishments born in the 2010s employ fewer people at 1-, 3-, and 5-year survival marks than their 1990s counterparts. (See chart 5.)

For the cohort of establishments born in 1994, establishments employed 7.2 people on average at birth. Establishments that survived the first year employed an average of 9.1 employees. After 3 years, the average employment for surviving establishments from the same cohort was 11.4 employees. For those establishments born in 1994 that survived 5 years, average employment had grown to 13.2 employees.

In contrast, establishments born in 2017 employed an average of 4.2 people at birth, and those that survived the first year employed an average of 5.4 employees. After 3 years, surviving establishments employed an average of 7.0 employees. Those establishments that survived 5 years after their 2017 birth employed an average of 8.2 employees. At each yearly milestone, the cohort of establishments born in 2017 only employed approximately 60 percent of the number of people employed by 1994 cohort businesses at the same milestone.¹⁷