We all know good-paying jobs are important to our economy, both locally and nationally.
Our legislative and congressional policymakers spend a good deal of time debating job creation policy. Each city in the Treasure Valley has an individual assigned to economic development. Our chambers of commerce work to improve the economy for our local companies.
But sometimes I fear all this effort, while well-intentioned, is under-informed on how jobs actually get created.
About 30 years ago, Professor David Birch of the Massachusetts Institute of Technology published groundbreaking research showing that about two-thirds of all net new jobs (jobs created minus jobs lost) between 1969 and 1976 were created by firms with 20 or fewer employees (David Birch, “Who Creates Jobs,” Public Interest, Fall 1981, pp. 3-14). This research led us to understand better the extremely important role of small business in the U.S. economy.
Now the Kauffman Foundation has published a surprising new study of job creation in the economy (Tim Kane, “The Importance of Startups in Job Creation and Job Destruction,” The Ewing Marion Kauffman Foundation, July 2010). Their research mined a new U.S. government dataset called the Business Dynamics Statistics, which includes age of company as well as employment data. Here’s what they found: “Startups aren’t everything when it comes to job growth. They’re the only thing.”
The data show that in all but seven years in the period from 1977 through 2005, existing firms on balance lost more jobs than they created.
Clearly employment didn’t drop in the other 22 years. So where did the job growth come from? It came from new companies.
How can this be? If you think about it, a startup by its very nature starts with zero jobs and with its first hire creates a job.
Over this 28-year period, startups created an average of 3 million jobs each year. But once started, some firms add jobs, others lose them. On balance, after the first year existing companies lose more jobs than they create. Of course, not all companies destroy more jobs than they create, but when summed together, existing firms stop growing, may lay off workers or even go out of business.
This has several public policy implications. Of course we should not ignore our existing businesses. Helping them grow is important. But I am intrigued about what we can do to encourage entrepreneurs to start businesses in our Valley. Here are several thoughts.
INVEST FINANCIAL RESOURCES
We should consider investing some of our economic development resources into support for entrepreneurs. Recruiting a company to come to the Valley may lead to good headlines, but may not lead over the long run to job growth. Some states have used tax policy, such as tax credits, for investing in new businesses to encourage capital.
FOSTER RESEARCH AND SUPPORT
Incubators, when combined with support such as that provided by the Boise State University TECenter in Nampa, can provide nurturing support for entrepreneurs.
Funding research programs in our universities produces new knowledge that can become the basis for a new business.
And joint public/private partnerships such as The Core in Meridian may provide a seed bed that will attract entrepreneurs and capital.
Kevin Learned is a counselor at the Idaho Small Business Development Committee, a member of the Boise Angel Fund and the finance committee of the Idaho Technology Council. Contact him at firstname.lastname@example.org.