Message to the Incoming Class: It’s All About the Startups

Posted by: Jonathan Ortmans on The Kauffman Foundation Policy Blog, October 11, 2010

Jonathan OrtmansThe past few months have brought a new series of reports dissecting the job creation phenomenon by new firms, timely at a time when so much of the economic discussion lately in the U.S. has focused on strategies to recover the roughly 8 million jobs lost during this past recession. We already knew that research has firmly established that new firms—those no more than five years old—over the past three decades have been responsible for virtually all of the net new jobs created in the U.S. economy (see 2009 reports “Jobs Created from Business Startups in the United States,” and “Where Will The Jobs Come From?”).  As the nation debates this leading up to the mid-term elections in the United States, let’s further examine U.S. job growth and its relationship to startup companies.

In March, a new study by the Kauffman Foundation’s Dane Stangler, “High-Growth Firms and the Future of the American Economy,” zoomed in on new firms that scale using data from the Census Bureau. The study demonstrated that not only are new firms generally important to the vitality of the economy and job growth, but new firms that grow in revenues and jobs are especially important. More precisely, the top 1 percent of all companies generate 40 percent of new jobs, and the vast majority of these firms are no more than five years old. If we further zoom in on the most rapidly growing young firms (those between ages 3-5 years), they represent less than 1 percent of all companies in the economy, but account for 10 percent of new jobs created each year.

Then in July, defying conventional wisdom supposing that all businesses contribute to job growth at least to some degree, “The Importance of Startups in Job Creation and Job Destruction” by economist Tim Kane documented that net job growth occurs in the U.S. economy only through startup firms. While older companies lose 1 million jobs annually, new firms add an average of 3 million jobs in their first year. Moreover, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle. As the news release for this study stated: “When it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing.”

But what happens to job creation after initial startup? We know that many new firms fail. “After Inception: How Enduring is Job Creation by Startups?” challenges conventional thinking that many of the new jobs created by startups evaporate over the course of just a few years as firms exit the market. By tracking cohorts of firms started from 1977–2000, authors Michael Horrell and Robert Litan found that while many firms exit over the life of each cohort, destroying jobs in the process, other firms also grow and create jobs, partially balancing out the jobs lost by closing and shrinking firms. In fact, cohorts of firms started each year retain, on average, 80 percent of their initial total employment to age five.

Those running for public office next month should take a hard look at proposals for job-creation policies aimed at devoting our limited resources to lure larger, established businesses, or even, dare I say it, simply “small” businesses. The most recent research, some of which I have referred to above, should point policymakers to one new direction: growth would be best boosted by supporting young firms. And how to help new firms grow into those viable job creators is not rocket science. It simply requires a little courage from newly elected representatives smart enough to see that removing barriers and making the path easier for new and young firms is the fastest way to make jobs for and reduce poverty within our least wealthy citizens.

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Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.

Category: Growth & Poverty  Tags: jobs

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