The Metro Areas With More New Businesses

Younger companies are crucial to creating jobs and promoting innovation in local economies.
by | September 1, 2016
The Las Vegas Strip (David Kidd)

Younger businesses and startups are often key to fueling future economic growth, so considering the age of employers can provide valuable insight into a local economy.

A Governing analysis of data released Thursday by the U.S. Census Bureau depicts sizable variation in the presence of employers that have been operating for no more than three years. In the largest metro areas, younger companies make up anywhere from 15 percent to 30 percent of employers. Nationally, they account for about 22 percent of businesses with paid employees.

The census estimates were published as part of the new Annual Survey of Entrepreneurs, which covers data collected in 2014 for states and the top 50 metro areas.

Metro areas out West and in the southern U.S. tend to have greater concentrations of startups and relatively new companies. They accounted for more than a quarter of all employers in the metro areas of Austin, Texas; Dallas; Las Vegas; Miami; and Orlando and Tampa-St. Petersburg in Florida.

Recently launched businesses carry several potential benefits for their regions.

For one, they drive the vast majority of all net job growth, at least nationally. While it’s true that startups tend to have high turnover and are frequently forced to make cuts, those that survive after a few years often experience rapid growth. What's more, newer businesses are more likely to hire younger workers and those on the margins of the economy who more established firms might overlook, said Arnobio Morelix, a senior research analyst at the Kauffman Foundation.

Research also suggests that newer businesses account for an outsized share of productivity gains. They similarly play a crucial role, said Morelix, in promoting innovation. This can take the form of patents and intellectual property or other advances, such as the establishment of new manufacturing processes.

While young businesses are responsible for a disproportionate share of job growth nationally, a large presence of these ventures doesn’t necessarily translate into strong growth within a region. That's true of both the Las Vegas and Miami metro areas, which have high concentrations of new businesses but rank near the bottom in a Kauffman index measuring economic growth.

In general, younger businesses tend to be less common in parts of the industrial Midwest and Northeast. Their absence is most apparent in the metro areas of Cleveland; Hartford, Conn.; and Pittsburgh, where they account for only 16 percent of employers.

This table lists the share of total firms operating for no more than three years, along with the share of all employees working in these businesses.

Figures represent firms with paid employees established within three years prior to survey.

SOURCE: Governing calculations of 2014 Annual Survey of Entrepreneurs data; U.S. Census Bureau

(The Kauffman Foundation’s index of startup activity depicts similar rankings.)

So what explains why some regions have more new businesses than others?

Part of it simply has to do with the performance of individual sectors in local economies. Consider real estate in the Las Vegas metro area: The sector rebounded following the housing market crash, and 37 percent of related businesses there were no more than three years old in 2014. Meanwhile, areas more reliant on manufacturing typically have more older businesses.

Nationally, newer businesses are most common in the industries of transportation/warehousing, accommodation and food services and least common in manufacturing.

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Additionally, the presence of newer businesses is a function of demographics. The prime age for starting a company is around one’s late 30s or early 40s. In recent years, more older adults are becoming new entrepreneurs. According to the Kauffman Foundation, the share of all new entrepreneurs between the ages of 20 and 34 declined from 34 percent in 1996 to 25 percent last year.

Morelix cited greater fluidity of resources, such as capital and talent, as one trait that regions with more younger firms have in common. Noncompete agreements and stricter requirements to obtain capital, for example, hinder efforts to expand startups.

“If you find that these resources don’t flow within the community," said Morelix, "it might constrain scaling up a startup."

Hiring in younger businesses experienced a significant slowdown during the Great Recession. Research details how new small businesses are more sensitive than older small businesses to economic shocks. Yet despite the slowdown, newer businesses still continued to outpace older companies in job gains during the recession.

But one can’t ignore older, more established firms. Nationally, a mere 3 percent of all businesses in the census survey had operated 16 years or more -- the oldest age bracket -- but they accounted for more than half (54 percent) of all paid employees. And a Brookings Institution analysis found that the share of private employees working for older companies has been increasing in recent decades.

Established employers tend to provide lower wages but more attractive benefits and better job security than younger businesses. A report published last year also suggests that as businesses grow in size, so too does wage inequality across jobs of varying skill levels.

The new census data suggests these older companies are most prevalent in the metro areas of Birmingham, Ala.; Memphis, Tenn.; and Richmond, Va.

This table lists shares of total firms and paid employees in businesses operating for at least 16 years:

Figures represent firms with paid employees established at least 16 years prior to survey.

SOURCE: Governing calculations of 2014 Annual Survey of Entrepreneurs data; U.S. Census Bureau