Study provides insights into the role new firms play in economic growth
While the current economic turmoil arouses anxiety and concern over job losses and business failures, new research by the Ewing Marion Kauffman Foundation shows that the "churning" of jobs and businesses also sows the seeds for future growth and productivity gains. New firms play a vital role in the process that links churning to productivity gains.
According to Turmoil and Growth: Young Businesses, Economic Churning and Productivity Gains, new and growing businesses create millions of jobs each year. At the same time, exiting and declining businesses destroy millions of jobs. The study, conducted by researchers from the University of Chicago, University of Maryland and the U.S. Census Bureau, points out that the contribution of new businesses extends beyond initial entry, with surviving businesses having very rapid employment growth in their early years.
The report's analysis of productivity data shows that young businesses have higher productivity levels and faster productivity gains than more mature businesses, particularly in the early years. In effect, the churning process replaces lower productivity businesses with new, more productive ones, thereby increasing productivity and raising living standards.