Leading Entrepreneurship

“It appears that the turmoil in our economy is actually one of its greatest strengths,” reports Steven J. Davis.

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 (pdf), 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. Bureau of Census, 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.

“More than one-third of job creation is due to the entry of new establishments, and a similar proportion of job destruction is from existing businesses,” according to Steven J. Davis, a co-author of the report from the University of Chicago.