Startups Moderate Hiring Shows Caution Trumps Enthusiasm

Startups should be at the core of optimism and enthusiasm when it comes to the recovery of the economy as they help drive growth in many sectors, including jobs. Otherwise, why risk capital in an environment of terrible financial risk? But new businesses are cautious these days and simply hire fewer people than they did just a few years ago. That makes them very like large businesses, which for the most part have staged a job addition moratorium.

New research from the Ewing Marion Kauffman Foundation shows that “the growth path and survival rate of new businesses means they are generating fewer and fewer new jobs.” The comment is from a new study by the group entitled “Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation.” The negative trend may even predate the downturn of 2007-2009.

The obvious conclusion most readers will take from the study is that small business, which is an important engine of economic growth in the U.S., can no longer be counted on to lift the economy. But ultimately, the case is worse than that. Startups are at the heart of a belief that U.S. GDP has grown. The idea of creating an enterprise in a recession is a foolish one which depresses startup activity.

The Kauffman Foundation does not address whether there are fewer startups now than there were before the recession. It only counts the number of workers at a typical startup. That begs the question of whether more new businesses would be created if the overall impression of the economy was that it is currently healthy. According to the study, entrepreneurs are cautious because they are worried about the economy.

There are already a number of signs that the flattening of GDP growth and increases in commodities prices will keep employee additions at many large companies down. And if the Kauffman Foundation is right, small businesses will not help the unemployment problem, either. On top of concerns at both large and small firms is the effect of government austerity measures at all levels, which have caused a series of layoffs that are likely to continue as states, town and the federal government sort out their deficit problems.

No one is of a mind to add workers. Unemployment levels are not going to change soon.

Douglas A. McIntyre