Decline in New Business Formation Is Hurting the Job Market

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On behalf of Daniel Watkins of Watkins Firm, A Professional Corporation posted on Thursday, March 31, 2011.

Recently a branch of the Federal Reserve Bank issued a paper that showed a steep decline in entrepreneurship over the last several years. The Fed found that the number of businesses with employees went down dramatically. The number of businesses with employees is one of the indicators of entrepreneurial activity in the economy.

For decades, the number of businesses with employees stayed consistently above 20 per thousand Americans. Since 2005, the number has fallen to 18.5, and is continuing to decline. One reason for the decline is that some businesses failed or wrapped up, but the Fed concludes that the main reason for the falling numbers is the decline in new business formation.

The Fed’s paper says that 68,490 more businesses closed in 2009 than in 2007, an 11.6% increase in the business closure rate. But in 2009, 115,795 fewer employer businesses were founded than in 2007, a 17.3% decline in new business formation.

San Diego business formation attorneys noted that the Fed’s paper found that new firm formation declined in many other countries as well, due to the worldwide nature of the economic crisis.

The dearth of new businesses is one factor that has led to the failure of the job market to bounce back.

Given these findings, it is perhaps no wonder that the job market is still so poor. Many experts believe that new businesses (not necessarily just small businesses), are a prime creator of job growth. Without new business formation, hiring numbers are likely to remain depressed. Layoffs hurt the job market, but what hurts it even more is a lack of new hiring.

Source: New York Times Economix “A Decline in American Entrepreneurship” 3/31/2011