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Businesses starting smaller, creating fewer jobs: study

By Lucia Mutikani

WASHINGTON (Reuters) - New businesses are starting leaner and with fewer employees than was the case in the past, an independent study showed on Monday, suggesting that the pace of job creation will remain frustratingly slow.

The study by the Kauffman Foundation found that this trend was already entrenched well before the 2007-09 recession, which destroyed more than 8 million jobs.

Startups are key to long-term employment growth. The study drew on data on new establishments from the Bureau of Labor Statistics and the Census Bureau to paint a bleak picture of an economy struggling to generate enough jobs to absorb the 14.1 million unemployed Americans.

Job growth has stalled in recent months, with employers adding a scant 18,000 workers to their payrolls in June and the unemployment rate ticking up to 9.2 percent from 9.1 percent in May. Nonfarm employment increased a meager 25,000 in May.

"One of the major problems that we have is that businesses have been starting smaller and growing less for the last several years," said E.J. Reedy, a Kauffman Research fellow and co-author of the study.

"That jobs deficit has accumulated and needs to be addressed," he told Reuters, noting that new businesses were struggling to grow in the first five years.

Prior to the recession, roughly 45-50 percent of start-ups survived. But the survival rate has dropped below 45 percent.

The study found that new firms created in 2009 were on track to create one million fewer jobs in the next decade than historical averages. Historically, new firms in the United States generate about 3 million new jobs every year, but have since downshifted, creating only 2.3 million jobs in 2009.

JOBS DEFICIT

The study's analysis of the Census Bureau's data found that the number of new employer businesses had dropped 27 percent since 2006.

Although the level of startups has held steady or even edged up since the recession, when including new employer businesses and newly self-employed workers, it said they did not grow enough to generate the new jobs needed to support overall economic growth.

Its analysis of BLS data shows employment at new businesses dropped from a peak of 4.7 million jobs annually between 1997 to 2000 to less than 2.5 million in 2010.

At the firm level, the decline is more dramatic. New businesses opened their doors with about 7.5 jobs on average for much of the 1990s, the study found. But the number has dropped to 4.9 jobs.

Similar findings are deduced from the Census Bureau data. Aggregate employment at new establishments peaked in 2006 at just under 7 million jobs and dropped to fewer than 4.5 million by 2009.

An examination of the Census Bureau's data on new independent firms showed a 700,000 decline in jobs created between 2008 and 2009.

"While the recession certainly deepened the jobs deficit, the U.S. economy stopped producing enough new jobs well before the downturn," said Robert Litan, Kauffman Foundation vice president of research and policy and study co-author.

"Startups are the key to long-term employment growth, and they have been hiring fewer people for the last several years. We won't fix our core unemployment problem in the United States until young businesses get back on track."

The study recommended that policymakers focus on young and small businesses to address the nation's unemployment problem, and it cautioned against hoping that the growing ranks of self-employed workers will solve the jobs shortfall.

"We need to find a way to start more employer businesses, ensure that they are larger and nurture their growth," Litan said.

(Reporting by Lucia Mutikani; Editing by Dan Grebler)

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