Startups and Older Firms: Which Is More Responsive to Local Economic Changes?

By Norris, Ann | Monthly Labor Review, April 2014 | Go to article overview

Startups and Older Firms: Which Is More Responsive to Local Economic Changes?


Norris, Ann, Monthly Labor Review


In recent years, the words "entrepreneur" and "startup" have been considered nearly synonymous with job creation and economic growth. In today's postrecession environment, much focus has been placed on the ability of new businesses to thrive despite challenging economic factors, whether local or national. In "Firm age, investment opportunities, and job creation" (National Bureau of Economic Research working paper no. 19845, January 2014), authors Manuel Adelino, Song Ma, and David T. Robinson discuss firm age and how this relates to firms' responses to local investment opportunities. The authors explore the notion that new firms--being less bureaucratic and more flexible--are better equipped than older firms to handle exogenous changes to the local business environment. In contrast, older businesses are stable and presumably have more access to capital than their younger counterparts, so it is popularly believed that older businesses are better equipped to deal with exogenous economic shocks.

A few different conditions are used to explore the underlying hypothesis that younger firms are more responsive to changes in local investment opportunities. First, changes to local income are measured by examining both national manufacturing employment and the preexisting manufacturing sector in commuting zones (CZs). The Department of Agriculture defines CZs as a region that enables workers to travel easily for employment; these regions comprise an average of five counties. CZs represent economic boundaries better than do existing county or political boundaries. Next, employment growth is examined to see how firms of different ages respond to changes in local income. The nontradable sector is used because it does not take into account technological or product innovation, two advantages that are often associated with startups. (Nontradables are services or items with a high cost of transport and therefore tend to be local in nature.) The data for employment by firm age come from the Quarterly Workforce Indicators, published by the Longitudinal Employer-Household Dynamics (LEHD) program of the U.S. Census Bureau.

Using the LEHD dataset for CZs, firm-age categories are defined as follows: up to 1 year (young firms), 2-3 years, 4-5 years, 6-10 years, and 11 years or older. The 2-year net job creation for each category shows that the youngest firms create the most jobs on average, while older firms lose jobs over the same 2-year period. In short, young firms create the most new jobs in the nontradable sector even though these firms account for just 6 percent of total employment in the nontradable sector. To measure income growth in the same LEHD dataset, a 2-year growth rate is used. …

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