The science behind the first hire: Which entrepreneurs become employers?


Which firms without employees right now are most likely to post a sign like this on their door in the coming years? A new study give us some hints. (Alex Wong/Getty Images)
December 16, 2013

It’s a commonly cited statistic in Washington: Small businesses are responsible for creating most of the nation’s new jobs every year.

The truth is, though, it’s a relatively small fraction of those small businesses that contribute to that statistic. In fact, roughly three in four small firms in the United States are what are known as non-employer firms; other than the job the owner creates for himself or herself, no new jobs are generated.

Researchers at the Small Business Administration’s Office of Advocacy see those solopreneurs, as they are sometimes called, as a potential source of new jobs for the economy. So, they set out to determine what drives non-employer firms to make the leap to become employer firms.

In a new report, they identify a number of factors that coincide with solopreneurs hiring their first employees.

Here’s a breakdown of what they discovered.

An entrepreneur is likely to hire in the first two years — or not at all.

Citing data from a study conducted by the Kauffman Foundation of 5,000 non-employer firms launched in 2004, researchers note that 38 percent of the companies had hired their first worker by the end of their first year in business. By the end of year two, more than half of the firms, 51 percent, had started to hire. After that, the churn of non-employers to employers virtually ceased.

Asian-American, male business owners are quick to hire.

Statistically, male solopreneurs are far more likely to become employers than their female counterparts, both in the short- and long-term, researchers found. During their first two years in business, 55 percent of non-employer firms owned by men hired at least one worker, compared to 44 percent of women-owned firms. By the end of the study, the disparity had changed little, with 62 percent of male-owned companies and 52 percent of women-owned companies making their first hire.

Broken down by race, the firms owned by white entrepreneurs and black entrepreneurs showed little difference in their propensity to hire a first employee, with 59 percent and 58 percent, respectively, adding a worker during the course of the study. However, Hispanic and Asian-American entrepreneurs were significantly more likely to hire, with 67 percent and 70 percent, respectively, becoming employers.

Hiring likelihood not connected to education or experience.

One might think an entrepreneur with an advanced degree or a long history in the industry would be more likely to add workers. But that doesn’t jibe with what the researchers found.

Wholesalers, transportation firms need human resources.

Non-employer start-ups in wholesale trade and transportation sectors have the highest rate of hiring employees, with 88 percent of wholesale firms and 90 percent of transportation firms in the study adding workers by the end of year seven. Manufacturing (76 percent) and construction (79 percent) weren’t far behind.

Conversely, fewer than 60 percent of non-employer firms specializing in either finance, entertainment or food services added workers.

Other hiring helpers: patents and copyrights.

For firms that own patents, the probability of hiring an employee jumps from 23.3 percent to 31.9 percent. Having any intellectual property at all (including copyrights and trademarks) is associated with a 7-point bump in hiring likelihood.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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