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'Churning' is Good for the Nation's Economic Growth and Productivity
Republished with permission from the Ewing Marion Kauffman Foundation
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. 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.
"This study reveals important information to policymakers, citizens and researchers on the complex role of new businesses in the economy," said Robert E. Litan, vice president of Research & Policy, Kauffman Foundation. "The reallocation of jobs, workers and capital to their best use is a major force behind productivity gains over time, and these gains are the main source of improved living standards."
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. "It appears that the turmoil in our economy is actually one of its greatest strengths."
About the Kauffman Foundation
The Ewing Marion Kauffman Foundation is a private nonpartisan foundation that works to harness the power of entrepreneurship and innovation to grow economies and improve human welfare. Through its research and other initiatives, the Kauffman Foundation aims to open young people's eyes to the possibility of entrepreneurship, promote entrepreneurship education, raise awareness of entrepreneurship-friendly policies, and find alternative pathways for the commercialization of new knowledge and technologies. It also works to prepare students to be innovators, entrepreneurs and skilled workers in the 21st century economy through initiatives designed to improve learning in math, engineering, science and technology. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo. and has more than $2.4 billion in assets. More information is available at www.kauffman.org.
Download the full report: Young Businesses Economic Churning, and Productivity Gains .
©2008 The Beyster Institute and its authors and their entities. All rights reserved.
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