Job Growth Overview: Start-Up Companies are Florida’s Top Job Creators

Start-Up companies are Florida’s top job creators.  Our policies must help Start-Up entrepreneurs open their doors sooner, hire their first employees quicker, and get Floridians back to work.

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Abstract
Florida’s start-up companies have driven job creation throughout the recession. New start-ups have created 1.475 million jobs in the state of Florida between 2005 and 2009. Net job creation by Florida start-ups—job creation minus job destruction—was 788,256 since 2005. Without start-up activity, Florida would have lost more jobs than were created over this period. This paper presents an analysis of the contribution of start-ups compared to older firms to job creation in the state of Florida over the last fifteen years.

Introduction
Net job creation has always been driven by start-up activity.  On average, new start-ups create about 217,558 jobs in Florida each year.

Net job creation is job creation minus job destruction. Policymakers wanting to increase net job creation can focus on either encouraging job creation or reducing job destruction. Job creation is driven by start-up activity, and job destruction is driven by older firms. Net job creation from firm relocation to the state is an insignificant contributor net to job growth in Florida.

Net job creation can be positive or negative, with negative net job creation referred to as net job destruction. Net job destruction was 404,624 in Florida in 2009, meaning that about 400,000 more jobs were destroyed than were created in Florida that year. In Florida that year, 915,172 jobs were created and 1,319,796 jobs were destroyed.

Jobs are created and destroyed by firms, and firms are composed of establishments. Job creation can occur either by opening new establishments or expanding existing establishments. Similarly, job destruction can occur either by contracting or downsizing at existing firms or by closing establishments. In the language of the Census Business Dynamic Statistics (BDS) database, jobs created by opening new establishments are called births and jobs destroyed by closing existing establishments are called deaths.

A start-up is a firm in its first year of business. This follows the definition used in other research of start-ups (Kane 2010). In the BDS statistics, a start-up is a firm of age zero. A new start-up is a firm that was established in 2005 or later, with one exception. In Chart 1, start-ups refer to start-ups founded in the corresponding five year period.

Table 1 shows job creation, destruction, and net job creation in Florida from 2005 to 2009. These data come from the BDS database. Comparing 2009 to 2005 shows that job creation decreased by almost the same amount that job destruction increased—Florida created 400,000 fewer jobs and lost 300,000 more jobs in 2009 than it did in 2005.

Cumulative net job creation in Florida is only 159,836 for 2005-2009, and net job creation in Florida has been negative since 2007 when the current recession began. Most recently, Florida lost 400,000 net jobs in 2009, a significant increase in net job loss from 2008.

Table 1 indicates that the recession has had a significant impact on net job creation by both reducing job creation and increasing job destruction. Net job creation peaked in 2006 at 440,619, and since the recession net job destruction has increased every year to its most recent high of 404,624 in 2009.

Chart 1 shows cumulative net job creation for new start-ups and older firms for the periods 1995-1999, 2000-2004, and 2005-2009. The numbers are cumulative job creation numbers at the end of the five year period. For each period, new start-ups are start-ups founded in the corresponding period, so start-ups founded between 2005 and 2009 had created 788,256 net jobs. Similarly, start-ups founded between 2000 and 2004 had added 958,945 net jobs as of 2004 (Census BDS data).

These data indicate that new start-ups have been the driving force behind job creation in each five year period, and that there would be no net job creation during the fifteen year period were it not for start-up activity. For every five-year period but the first, net job creation by new start-ups is positive and net job creation by older firms is negative. Whether in times of economic expansion or recession, start-ups consistently add more jobs than they destroy, and older firms typically destroy more jobs than they add.

Table 2 shows the contributions to net job creation in Florida from 1999 to 2008 from the opening of new establishments, the expansion of existing establishments, and the relocation of firms to Florida from other states. The number of jobs in Florida increased by 3 million jobs during this time, from 8.5 million in 1999 to 11.6 million in 2008. The second column shows the number of net jobs created by each activity as a percent of the 1999 total job level, and the third column shows the contribution of each activity as a percent of total net jobs created. Start-up activity is part of net job creation at new establishments, which also includes jobs created at new establishments opened by existing firms.

These numbers reflect the cumulative effect of openings, relocations, and expansions over the period. According to YourEconomy.org, “The opened factor reflects the difference between births and deaths (openings and closings) of establishments. The expanded factor reflects the difference between establishments that have increased jobs compared to those that have contracted their labor force. And the relocated factor looks at establishments that have moved into a designated region versus those that have left the region, along with the resulting impact on jobs.”1 For example, jobs created by the expansion of a company that relocated in the previous year count as part of the relocation total, not the expansion total.

Table 2 shows that almost all job creation is through opening new establishments or expanding existing establishments. The opening of new firms—start-ups—and new establishments is the largest contributor, followed by the expansion of existing establishments. More than 1.9 million net jobs were created by Florida start-ups, and another 1.1 million were created by the expansion of existing establishments. Close to two-thirds of the increase was due to openings, and about one-third from expansions.

The contribution to net job creation from the relocation of existing firms to Florida is relatively insignificant. Approximately 33,000 net jobs were added by the relocation of firms to Florida, about 1% of the total increase. This figure is in line with national numbers, as only a handful of states added more than 1% to their 1999 job levels from firm relocation. In percentage terms, Delaware added the largest percentage of net jobs through firm relocation, leading to an increase of 1.8% net jobs since 1999, though this amounts to only 9,921 net jobs over the period. This statistic should provide policymakers with an upper bound to their estimates of how much net job creation can be affected by firm relocation.

Conclusion
Start-up companies are Florida’s top job creators.  Job creation is driven by start-up activity, and policies that promote start-up activity will generally lead to net job creation. Such policies can be considered aggressive.

Job destruction is driven by the activity of older firms. Policies promoting employment at existing firms generally affect net job creation not by the creation of new jobs but by increasing the retention rates and reducing job destruction. These policies can be considered defensive.

Job creation in Florida through firm relocation is an insignificant contributor to net job growth. Policies encouraging firm relocation from other states are not likely to have a significant impact on job creation and net job creation. These policies do not contribute any net national jobs and may encourage retaliatory efforts from other states. Policymakers should be responsive to firms already intent on relocating from another state, but efforts spent recruiting companies not already considering relocation are likely wasted.

Promoting start-ups is the key to Florida’s economic recovery.  Reducing the time and cost it takes entrepreneurs to launch start-ups will encourage job creation and help put more Floridians back to work.  The Start-Up Florida initiative from the Foundation for Government Accountability will provide research and specific reforms that will help get Florida working again.

Notes and Sources
Census (U.S. Census Bureau), Business Dynamics Statistics Database. Available at: http://www.ces.census.gov/index.php/bds/bds_database_list.

Kane, Tim, “The Importance of Startups in Job Creation and Destruction,” Kauffman Foundation Research Series: Firm Formation and Economic Growth, Ewing Marion Kauffman Foundation, July 2010. Available at: http://www.kauffman.org/uploadedFiles/firm_formation_importance_of_startups.pdf.

1 YourEconomy.org database. Available at: http://youreconomy.org/.