We are Hiring: Growth Opportunities for New Firms and the Business Cycle

Abstract

Whether firms founded in economic crises have sufficient growth potential is an important question for both aspiring entrepreneurs and policy makers. However, existing research in entrepreneurship and economics offers conflicting answers and most studies either focus on aggregate cohort-level effects or selectively exclude small new businesses from their analyses. We argue theoretically and explore empirically that young firms of different ages and sizes respond highly heterogeneously to cyclical conditions. Using extensive linked employer–employee data on young German firms, we reveal that the average new firm finds it easier to hire its first employees when it is founded in a crisis. These firms achieve countercyclical growth through hires of career entrants who face difficulties staring their careers during the crisis. More specifically, hiring in very young and small-to-medium-sized young firms is countercyclical, whereas the same does not hold true for older and larger young firms. Firm-specific effects for young entrepreneurial businesses can hence strongly differ from effects previously presented in the literature.