What Types of Entrepreneurs Become Employers? If a small-business owner is going to hire any employees at all, chances are he or she will do so in the first three years, according to a new study.
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President Obama has called small businesses the backbone of the U.S. economy, as they create most of America's new jobs each year. What's often overlooked is that the majority of these new jobs are created by a relatively small percentage of small businesses: roughly 3 in 4 small firms in the U.S. can be defined as non-employer, meaning a job is created for the business owner, but that's it. According to researchers at the Small Business Administration, self-employed business owners who create jobs for themselves represent "more than 10 percent of total employment in the United States."
Most existing small businesses, then, have not hired a single employee. Using data from the Kauffman Foundation, researchers at the SBA identified a number of factors that help indicate whether a non-employer entrepreneur will eventually go on to become a job creator. The study tracked 4,928 businesses (all founded in 2004) from 2004 to 2011; in that seven year time-period, "59 percent of non-employers hired their first employee, 13 percent did not hire anyone, and 28 percent ceased operations."
Time frame: If a small business owner is going to hire, chances are he or she will do it in the first three years. After that, the likelihood plummets. "Among non-employer businesses, 38.1 percent hire the first employee by one year after startup and 54 percent hire the first employee by three years after startup," the study states. By year seven, that percentage had only risen to 58 percent, with the rest of non-employer startups either going out of business (27.9 percent) or still operating without having hired an additional employee (13.3 percent).
Gender and ethnicity: Statistically, Asian and Hispanic business owners were the likeliest to become employers (70 and 67 percent) compared to black and white owners (58 and 59 percent respectively), the survey found. Men hire more in general; after the two years in business, 55 percent of non-employer businesses founded by a man had hired at least one employee, compared to 44 percent of small businesses owned and operated by a woman.
Education and more industry work experience: Surprisingly, both these areas had little impact on whether or not a business owner would hire in the first few years. "Among non-employer startups, it does not appear that the owner's education has a strong predictive power on whether the first employee is hired in the first several years of operation," Robert W. Fairlie, the author of the study, wrote in the report.
Industry: It matters. Entrepreneurs in transportation were the most likely to hire (90 percent), followed by business owners in wholesale (88.1 percent), construction (79.4 percent), health and education (79.2 percent) and professional services (78 percent).
On the other end of the spectrum, fewer than 60 percent of non-employer firms in the finance, information and entertainment, accommodations or food services become employers.