This analysis article includes updated data from an article published on this blog in January 2022, “Job Creation and New Startups in Idaho”
New private establishment formations
Idaho had considerably more startups relative to the local labor force than the nation overall, with the years 2010 through 2012 being one notable exception. Unlike past business cycles, the pandemic saw many Idahoans and Americans starting businesses as opportunity costs fell. Work furloughs and layoffs initially reduced employment opportunities and low interest rates lowered the threshold return on investment for prospective business ventures.
By 2022, there were more than 10 new private establishments in Idaho for every 1,000 Idahoans in the labor force. Nationally, it was over six new private establishments for every 1,000 Americans in the labor force.
Between 1994 and 2022, the annual number of new private establishments in Idaho (i.e., those less than a year old since opening) grew from 3,249 to 10,088, a 210.5% increase or about 4.1% on an annual basis. By comparison, the number of new establishments nationwide grew 87.3% or about 2.3% on an annual basis. This can be seen in Figure 1, with Idaho plotted along the left vertical axis and the United States along the right.
Generally, the formation of new private establishments has tended to be pro-cyclical — rising in economic booms, falling during recessions. Both the state and nation experienced declines in the number of new private establishments during the recession in the early 2000s and, more prominently, again during the Great Recession (2008-3009). However, growth rates within Idaho and across the country ramped up during the pandemic despite a deep contraction in economic activity in 2020. This exception to the rule could be attributable to the unique set of circumstances of the time that reduced the opportunity cost of starting a new business for many individuals, mainly a lack of employment opportunities due to large furloughs of the workforce. In addition, successive rounds of household stimulus payments and cheap credit allowed many new businesses to get off the ground.
If we take into consideration the total number of private establishments that exist, the share of new private establishments has followed similar trends as seen in Figure 2. From 1994 to 2004, the share of new private establishments hovered around 10-11% both statewide and nationally. In the leadup to the Great Recession, the Idaho share grew to around 12% before plummeting to about 7% in 2010; nationwide, it bottomed out at 8% the same year. The share of new private establishments began to rise again as economic activity recovered and entrepreneurs became more optimistic of their business prospects. By 2022 roughly 16 out of every 100 private establishments in Idaho was less than a year old compared to 12 out of 100 nationally.
The employment footprint of new private establishments
One impact of new establishments are the accompanying jobs. While their combined employment footprint is significant, new private establishments account for a smaller share of private jobs than they did decades earlier, despite their growing numbers, because their individual footprints have grown smaller over time.
Figure 3 plots the employment of new private establishments in Idaho and the United States over the same period. Statewide, the combined employment of these startups grew from around 15,000 in 1994 to just over 26,300 in 2022, a 74.5% increase or 2.0% on an annual basis. Nationwide, however, the combined employment of startups fell 10.1% over the same period, or -0.4% annualized.
While the number and share of new private establishments have grown in Idaho as well as nationally, the average number of jobs associated with a startup has continued to follow a downward trend as seen in Figure 4. In the mid-1990s, a new private establishment in Idaho hired about five workers on average while nationwide this average was about seven.
By the 2010s, these averages fell to around four and four-and-a-half, respectively, and by 2022 they had fallen further to two-and-a-half and three-and-a-half.
Looking at these two scenarios together might translate into either a growing or shrinking startup employment share among all private establishments. If the growing share of startups is larger, we would expect new private establishments to be gaining a larger slice of the employment pie; if the declining average employment size among those startups is larger, the slice will get smaller.
Figure 5 provides the share of total private employment for new establishments over the same time period for Idaho and the United States. From 1994 to 2010, both trends had been downward with startups accounting for a smaller slice of private sector employment. Since then, however, the acceleration of new private establishment formations was large enough that these shares have begun to recover, though they remain below their average level during the 1994-2007 period.
Survival analysis of new private establishments
Starting a new business is a risky endeavor as many startups fail within the first few years of operating. Despite this risk, many entrepreneurs go forward with their startup plans in the hopes they will eventually get a positive return on their investment. The survival function and hazard rate of establishments may help quantify this risk.
Two goalposts for a new business are making it through their first and fifth years of operations. As will later be shown, these are critical points in a new business’s lifespan as the chances of failure in any given period are notably higher when the business is still very young. Figure 6 plots the one- and five-year failure rates for new private establishments in Idaho and the nation, with the horizontal axis corresponding to the year in which the establishment opened. Statewide and nationally, roughly one-in-five new establishments failed within the first year during the 1994-2022 period, with high failure rates corresponding to the early 2000s and Great Recession. At the five-year horizon, roughly half of new businesses fail.
To get a better understanding of the long-run average of startup survivability, Figures 7 and 8 provide the survival function and hazard rate per 100 of new private establishments in Idaho over the 1994-2022 period. Note that each thin light grey line corresponds to a year cohort while the thick blue lines correspond to the average across cohorts.
From Figure 7, we can see that fewer than four out of five Idaho private establishments survive their first year after averaging over multiple business cycles. Just over a third survive to their tenth year of operations, while just over a fifth survive to their twentieth year.
Note the slope of the estimated survival function is steeper for younger businesses and begins to flatten with time. This tendency of infant businesses to fail at higher rates than older ones is reflected in the hazard rate, or the failure rate of an establishment conditional on its survival up to a given point (Figure 8). When businesses are young, their probability of surviving to the next year of operations is considerably lower than a mature business. This “high infant mortality” may reflect a number of difficulties young businesses face: untested business models, unrecognized products and brand name, financial constraints owing to lack of credit history and competition from well-established incumbent firms.
Note that the rising hazard rate at the right-side of Figure 8 may reflect a small sample size and that these few points reflect the 1994 and 1995 cohorts during the COVID-19 years.
The startup decision
Starting up a business is a complex decision that involves weighing expected future returns of the business against costs. These costs include not just explicit costs — structures, equipment, materials, personnel — but also the opportunity cost of what a person would earn from their current job if they didn’t start a business or the return on investing their capital elsewhere.
To help understand at least part of this decision, we can look at the entrepreneurship rate, or the number of new private establishments relative to the number of labor force participants. Figure 9 plots the entrepreneurship rate for Idaho and the United States over the same 1994-2022 period.
Idaho has had considerably more startups relative to the local labor force than the nation overall, with the years 2010 through 2012 being one notable exception. From 1994 to 2004, there were about five-and-a-half new private establishments for every 1,000 labor force participants in Idaho compared to a national rate of about four-and-a-half. Peaking in 2006 and bottoming in 2010, the entrepreneurship rate returned to these levels by 2015 as economic activity recovered from the Great Recession. Unlike past business cycles, however, the pandemic saw many Idahoans and Americans starting businesses as opportunity costs for many fell. Work furloughs and layoffs initially reduced employment opportunities and low interest rates lowered the threshold return on investment for many prospective business ventures. By 2022, there were over 10 new private establishments in Idaho for every 1,000 Idahoans in the labor force; nationally, it was over six new private establishments for every 1,000 Americans in the labor force.
One predictor for the entrepreneurship rate is the failure rate of past businesses, most likely a salient fact in the minds of aspiring entrepreneurs. If individuals see many business failures around them, they may be less inclined to start a business in the near future. Figures 10 and 11 provide graphic evidence of this possible predictor using lagged one- and five-year failure rates.
Looking at the failure of establishments started in the prior year (Figure 10), there is a discernible negative relationship between this failure rate and the number of startups relative to the labor force. For Idaho, every 10 percentage point increase in the lagged one-year failure rate was associated with about 2.4 fewer new private establishments for every 1,000 Idahoans in the labor force. Nationally, this relationship appears to be weaker at about -1.4.
Looking at the failure rate of businesses that started five years prior to the current year, the relationship is still negative and the slopes are now very similar — in Idaho and across the country, a 10 percentage point increase in the failure rate of businesses that started five years prior was associated with 2.1 fewer new private establishments for every 1,000 labor force participants.
While these correlations do not necessarily imply a causal relationship, a story of “one’s success begets another’s aspiration to succeed” suggests a hypothesis similar to older insights (e.g., the “animal spirits” of Keynes, or the tendency of persons to make decisions based on emotion and instinct) as well as newer ones from behavioral economics such as the availability heuristic, which is the tendency to rely on recent and immediate examples when making one’s decisions.
Matthew.Paskash@labor.idaho.gov, regional economist
Idaho Department of Labor
(208) 236-6710 ext. 4249
This project is 100% funded by the U.S. Department of Labor as part of an Employment and Training Administration award totaling $695,785.