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Fewer new businesses are emerging than before the Great Recession

The economy may be doing fine, but it’s still producing fewer new businesses every year than it did before the Great Recession struck. That's according to an analysis by the Economic Innovation Group, a policy and advocacy group founded by Sean Parker.

Screenshot of graph
Screenshot of graph from EIG report, based on data from U.S. Census Bureau

Driving the news: According to the latest Census Bureau data, 2016 was the best year for U.S. business formation since the financial crisis a decade ago. While that’s good news for the economy, the startup rate is still well below historical norms.

Why it matters: The startup rate is one indicator of economic vitality. For example, new businesses create new jobs. Even with the uptick in startup formation in 2016, new firms only employed 2% of all workers, and there were over half a million fewer jobs in startups in 2016 than before the recession.

  • Meanwhile, older and more established firms employ a growing number of workers. In fact, the share of all U.S. jobs found in firms that are at least 16 years old reached 74% in 2016 — its highest threshold ever. 

Tech impact: The trend is more pronounced in the high-tech sector, EIG found, despite the sector’s general enthusiasm for disruption and startups.

  • In fact, not only are fewer firms being founded than in the past, but even the most high-potential startups in every new cohort fail to survive and scale at rates similar to the years before the Great Recession.
  • Axios' Dion Rabouin notes in his Axios Markets newsletter this morning that a December NBER study states...
"[B]oth the declining startup rate and the rising dominance of older firms can in large part be attributed to demographic factors. ... With population growth now at an 80-year low on the most recent numbers, it seems that the country’s demographic reckoning is beginning to make itself felt in the economy."

The bottom line:  Fewer new businesses translates to wage stagnation, lower productivity, and uneven economic development between different regions of the country. 

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