Austin Chamber

February 10, 2015 – Business Dynamic Statistics – Firm Startups & Exits & Associated Job Creation & Destruction

Posted By Beverly Kerr | Feb 10, 2015
Central Texas Economy in Perspective Print Article Austin Chamber

New business formation in Austin climbed to 3,318 in 2012, exceeding by 1.9% the previous high of 3,295 attained in 2008, before the impact of the recession, according to new data from the U.S. Census Bureau's Business Dynamic Statistics program. Nationally, the number of new firms formed in 2012 (410,000) remains 27.0% below the peak attained in 2006 (562,000). Austin’s number of new firms grew 9.1% in 2011 and 6.1% in 2012. While Austin saw startups drop only in 2009 (by 14.3%), the number declined in four successive years nationally and growth in 2011 and 2012 has been more moderate—3.4% and 2.2% respectively.

Austin ranks 23rd among 366 metropolitan areas for number of new businesses created in 2012, a position significantly higher than where the metro ranks based on the size of its population (35th) or its economy (33rd).

Austin was among only 22% of metros seeing an increase in business creation in 2010. Growth was much more widespread in 2011 with 59% of metros experiencing growth. However, in 2012 the number of metros experiencing growth was nearly unchanged.

While new businesses formed in the Austin metro reached a new peak at 3,318 in 2012, Dallas-Fort Worth, Houston, and San Antonio have not yet seen the number of new businesses overtake pre-recession levels. Dallas-Fort Worth’s peak was 10,707 new businesses in 2005, compared to 9,470 in 2012; Houston’s peak was 9,135 in 2007, compared to 8,490 in 2012; and San Antonio peaked at 2,964 in 2006, compared to 2,501 in 2012. Growth in 2012 was 4.1% in Dallas-Fort Worth, 5.1% in Houston and 5.2% in San Antonio, each short of Austin’s 6.1% gain.

Although the number of businesses formed could be said to have recovered in Austin by 2012, on a per capita basis, new firms are not yet forming at the rate they were before the recession. Austin saw over 200 new businesses per 100,000 population each year from 2000 to 2007. These 200-plus rates even applied following the 2001 “dot com” recession which hit Austin harder than much of the rest of the country. In 2012, the rate in Austin has climbed up to 181 per 100,000 population. Nationally, 131 new businesses formed per 100,000 population in 2012, but the average through 2007 had been 177.

At a rate of 181 new businesses per 100,000 population, 2012’s rate of business formation is about 13% below the average seen in Austin over 2000-2007. Nationally, the rate in 2012 is about 26% lower than the same period. Over 2000-2007 the rate of business formation in Austin averaged 118% of the national rate, but in 2012 Austin’s per capita level of activity is 138% of the national rate. The Raleigh, San Jose, and San Francisco metros, also hotbeds of startup and venture capital activity, each have lower rates of business formation, 157, 162, and 168 per 100,000 population respectively in 2012, than Austin.

The Business Dynamic Statistics (BDS) program has become an important tool providing insights about business formation and growth, labor market dynamics, and other features of the economy crucial to understanding current and historical U.S. entrepreneurial activity. The latest release of new data, which arrived in late 2014, is only the second time that the program has provided such data by metropolitan statistical area.

BDS is the gold standard of business creation data. It is based on the Census Bureau’s Longitudinal Business Database of the universe of employer companies (not a sample survey) and tracks economic activity at both the firm and establishment level over a long period of time. BDS tracks the annual number of new businesses (startups and new locations), and, by firm age and size, tracks creation and destruction of jobs at the establishment level, providing a picture of the dynamics underlying aggregate net growth in employment.

The entrepreneurship-focused Kauffman Foundation is a BDS partner. Their research paper, The Return of Business Creation, employs BSD data to focus on two classes of new businesses the authors believe most closely resemble entrepreneurship: companies less than one year old with 1 to 4 and 5 to 9 employees. According to the authors, “it is new and young businesses, rather than small businesses generally, that have been the primary drivers of net job creation over the last few decades.” Therefore, the strength of the rebound in this subset relative to that of all new firms is of particular interest (see the detail for these classes in the graphics above). Nationally, job creation in new firms with 1 to 4 employees was up 3.3% in 2012, compared to 2.0% for all new firms. In Austin, job creation was up 5.9% in the smallest class while jobs created by all new firms in 2012 was down 4.4% from the total created the year before. Of the 18,202 jobs created by Austin startups in 2012, 55.5% were created by firms with fewer than 10 employees, compared to 52.1% nationally.

In the Austin metro in 2012, new establishments created 42,357 jobs and these new establishments included both startups (firms less than 1 year old) and new establishments of existing firms of varying ages. Expansions at existing establishments created another 74,939 jobs. Startups accounted for 18,202 or 43% of the 42,357 new establishment jobs. In 2011, startups accounted for 54%.

Young firms account for a much larger share of job creation than they do of employment and as the graph below illustrates, in Austin, they account for a greater share of job creation than they do in the nation as a whole.

The impact of the recession on new firms is seen in the reduced share of total employment that they account for after 2006 in Austin as well as nationally (see graph below). In 2012, 3,318 startups accounted for 18,202 new jobs, representing 2.7% of the region’s 682,876 jobs. The share was 2.9% in 2011.

The two following graphs illustrate shares of employment and job creation by firm size and also disaggregate job creation by firm size for new and for expanding establishments.

The jobs created by new establishments, such as the 8,641 created by ones with 1 to 4 employees, can also be disaggregated by firm age which would show that 81% of those jobs were created by startups (firms less than 1 year old). In the 5 to 9 and 10 to 19 employees classes, 76% of the jobs are attributable to startups.

Each perspective on business entry and job creation provided in the BDS dataset also applies to business exits and job destruction. The graph below summarizes jobs created by new businesses and continuing businesses and jobs destroyed by businesses closing and continuing businesses laying off jobs in Austin.

In Austin in 2012, 117,296 jobs were created—42,357 by new businesses and 74,939 by continuing existing businesses. At the same time, 81,122 jobs were destroyed—30,579 by businesses closing and 50,543 as layoffs by continuing businesses. The net result is positive net job creation of 36,174 in 2012.

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Beverly Kerr

Vice President of Research, Beverly Kerr, joined the Chamber’s Economic Development Department in 2004, following 10 years in a similar role with the Kansas City Area Development Council. Beverly earned an M.A. in economics at the University of Missouri-Kansas City.