Job Creation at Young Firms

The Kauffman blog Growthology has been running a series of very interesting posts on job creation by young firms. Basically, the idea is that young firms–less than five years old–are the most important source of net new jobs in the economy. The empirical basis is provided by a November 2009 Kauffman paper titled “Where Will the Jobs Come From?”  Here is the most compelling chart in the paper:

As the owner of a new business, I find this chart very interesting.  It includes everything from technological startups to new restaurants to cleaning firms.  But what they all have in common is that a lot of jobs are created by “founder optimism”–the willingness of someone to have faith and put resources into a business w/o guarantees.

I’m going to write more about this.

Comments

  1. The Fifth Horseman says:

    The removal of capital gains and other income taxes for founders of companies would be the single most stimulative thing that the government could do.

    Instead, the government is making the climate more hostile for new ventures.

    • I though Capital Gains was mostly claimed on things like dividends and stock valuations, and aren’t most public firms older than 5 years old? I fail to see the connection between that statement and this graph.

      • The Fifth Horseman says:

        An entrepreneur who starts a tech company will see his eventual payout in terms of capital gains.

        Capital gains would not be relevant to a restaurant, however.

  2. I wonder how much of those new jobs actually stick around though, for example, 80% of new restaurants go under. We know that in any given year there are millions of jobs filled, usually much more than the jobs vacated, it’s the difference in these two larger numbers that people usually talk about. I wonder if this graph isn’t a statistical artifact of the fact that there are plenty of dumb new businesses started every year, that don’t last very long, while stable older businesses don’t hire as much because they already employ many more people. However, if those stable companies are the ones that are actually creating sustainable jobs, this graph may be irrelevant.

    • If 80% of new firms go under (lacking other data, I’lll extrapolate from restaurants), but new firms generate over 6x the number of new jobs as existing firms, new firms may still generate more jobs.

      Besides, many would argue: what’s a sustainable job in the internet economy? Even short term jobs matter.

    • The new firms may still generate more new jobs than stable firms but the difference wouldn’t be quite as large as the above graph indicates. I agree that sustainable jobs are tough to categorize, but you certainly don’t want to include all the temporary jobs that are created by funding dumb ideas. For example, VCs fund a bunch of temporary jobs in the bay area, but what does it matter if all those VC-funded startups just burn through a bunch of cash and then sell their assets for a fraction of how much was invested? These dumb aggregated stats remind me of the claims of increased income stratification over the last decade, that were clearly shown to be incorrect when you disaggregate the data to see what’s actually going on. Besides, I think counting “jobs” is dumb anyway: if we all had personal robots and didn’t have to do any work (think Wall-E), we’d all have no “jobs” but would live much better lives. All those who count jobs today try to obscure this real progress that’s currently going on, because they’re primarily interested in winning narrow govt provisions that allow them to steal more money from taxpayers.

      • It’s true that you wouldn’t really want to categorize truly failed investment along with something more fruitful, but what I’ve heard is that even successful entrepreneurs tend to fail a few times in between successes, learning valuable lessons along the way.

        If we all had personal robots and didn’t have to work, that would be great. But if everybody had personal robots but you, what could you possibly offer that could gain you a robot in a fair trade? You’d better hope the robot owners are in a charitable mood.

        Jobs are great because they are a nice indirect measure of both economic activity and the ease with which people can participate in it. You should know that the more valuable the underlying good that you are trying to measure, the more likely the measure is going to be hijacked. :)

      • Yeah, I was going to mention that even those who worked for those failed businesses, whether waiters or computer programmers, at least got some experience out of it, but I don’t think Mike was making the case for small firms providing short-lived job training. ;) If you didn’t have a personal robot, you’d work for a little while till you could buy one, then stop working if you wanted. :) You won’t need charity because you can always work: there will always be people who will spend their time doing useful stuff, ie work, you just won’t have to. Of course, some will own thousands of robots while others will get by with just one, but that’s no different from today. I have no doubt that the morons on the left will then claim that owning your own robot is a human right and that therefore taxpayers must provide for those who can’t, just as they now invent “human rights” for taxpayer-provided housing or healthcare that never seemed to exist 100 years ago. Jobs are a fairly bad measure of economic activity, both because they don’t count many people who are working, just not in an officially reported 9-5 job, and because they create the illusion that “jobs” are the basis of economic activity. US manufacturing jobs dropped more than 20% this last decade but manfg revenue went up almost 5%, the robots are part of the reason for that. ;) I am well aware that the use of jobs as a metric is to try and create reasons for protectionism, which is why after I demolish those jobs arguments on their own terms, I usually point out that the terms themselves, ie counting jobs, are stupid.

      • Hmm, that manufacturing link should link here.

  3. Interesting statistics if true. Reminds of something I heard about forests and carbon sequestration that suggested it was the young trees that did the bulk of the work. I wonder if that means there may be benefits in letting the “mature” firms fail to free up resources for the more vibrant new firms? Is the US economy filled with rotten old hulks being propped up by taxpayers and strangling any possibility of new growth? Is a “forest fire” needed to clear the landscape?

  4. Mike Reardon says:

    A telling part in the Graph Figure 3 above it is clearly dated 2007. When pushing benefits of disruptive solutions in 2010-2011. The business solutions such as allowing easier bankruptcies within older firms to loosen capital or the American standard allowing greater mobility of personnel. Now can‘t be supported with the same results in the economy as in the ultra liquid 2007. Underwater home values have restricted mobility for most who would pack up and go back in the days. Falling from a secure place now is disruptive of the whole community. Greater unemployment is an issue not just of economic support.. It goes against distressed State funding going forward.

    Failure and sale of remains is now a business model that will cost trillions, but its becoming a nationally supported model for all firms. They throw off both unrealized social obligations and business liabilities that will end against greater lost State and Federal Revenue. But it has total support from both Party’s and Business.

  5. Yes, new firms and/or small firms create more jobs.

    But they also destroy more jobs. Several reputable economic studies have found that about 20% of small firms close their doors every year.

    Census and the Small business Administration publish data on job creation and destruction by small firms (under 500 employees) and their data shows that over time the share of jobs accounted for by small and large firms does not change significantly. Over time both small and large firms each account for about half of all employment.

    You can find the data here:

    http://www.census.gov/csd/susb/susbdyn.htm

  6. Another article you should read is:

    Survival and Longevity in the Business Employment Dynamics Data

    BLS, Monthly Labor Review, May 2005

  7. Shouldn’t that be immediately obvious? Companies are founded, grow, and then often transition into some kind of maintenance mode. At scale hiring only happens when companies either invest in new product development or scale into new/larger markets requiring a larger sales/support workforce. Once the market/business is tapped out, hiring goes into replacement mode and outsourcing/cost cutting.

    I’m wondering whether part of the phenomenon is the (recently increased?) paradigm by large companies of leaving the risk of new development to startups and then buy out the survivors. This would shift hiring away from “old” to “young” firms as the former essentially outsource the R&D they will no longer do to the latter. Conversely, the startups will increasingly look not towards “growing old”, but an acquisition exit.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Archives

Follow

Get every new post delivered to your Inbox.

Join 64 other followers

%d bloggers like this: