New Firm Formation Before And After The Recession

by Huaqun Li and Richard Borean, The Tax Foundation, March 04, 2015

Lately, we have seen good job growth numbers which has led to a reduction in the unemployment rate. At first glance, this is an encouraging sign for the economy. But when we have a closer look at data on business dynamics, it is clear that the overall economy has not come back to its full strength. Specifically, the economy is still not creating as many new firms as it did before the recession.

For example, around 560,000 new firms were created in 2006. By 2012, after what was called an “encouraging recovery,” the number of new firms created had declined by almost 37 percent, according to a report from Kauffman Foundation.

While the causes of declining new firm creation still remain a conundrum, it may shed more light on our problem by presenting the geographic distribution of new firm formation rates. New firms measured in this data are less than 1 year old employer firms, no self-employed individuals. New firm formation rates are calculated as the ratio of new firms to the total number of existing firms.

North Dakota is the only state with positive change. This is undoubtedly due to the economic boom fostered by shale gas drilling. At the other end, Nevada, Utah, Idaho, Arizona, Florida, Washington, Colorado were among the 10 states with top new firm formation rates in 2006 and dropped most significantly in 2012.

The anemic growth of new business can be infectious and impact the overall dynamism of the economy. A pro-growth tax code beneficial to promote entrepreneurial activity.

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