The refrain echoed in business media and government policy during the current recession is that small business is the engine of new jobs growth. This is generally presented as something that is obviously true, but there hasn’t been any compelling factual basis for this statement.
Today’s Op Ed from the WSJ and the related report from the Kaufman Foundation show that new companies not small companies actually are where jobs are created. The Report analyzed U.S. Census Bureau data to show that companies less than 5 years old created nearly 2/3rds of net new jobs in 2007.
It is surprising that it has taken so long in this recession to correctly characterize where jobs come from, especially since the data is available.
An excerpt from the WSJ Op Ed states:
“While a slight improvement over last month’s numbers, today’s employment update from the Bureau of Labor Statistics presents a dismal picture for American workers. As policy makers search for the best remedies to strengthen our economic performance, they can’t afford to overlook new firms and young firms.
“Unfortunately, in troubled economic times the language of recovery is too often tilted toward large, established companies or to “small businesses,” a broad term that traditionally applies to businesses with fewer than 500 employees. The conventional wisdom is that such businesses account for half of the labor force and are therefore the engine of future job creation.
“That’s not quite the case. The more precise factor is not the size of businesses, but rather their age. According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.”
The WSJ Op Ed and Report go on to recommend 4 policy actions to set conditions and encourage the growth of new companies:
- Welcome immigrants seeking scientific training at our universities, and make it easier for graduates to remain in the country.
- Provide greater flexibility in how university research is licensed and commercialized.
- Provide much easier access to capital through more flexible standards for lending to new businesses, and other incentives such as providing a payroll tax
“holiday” for new and young companies. - Make it easier and less expensive for companies to go public by lessening barriers and compliance requirements of regulations such as Sarbanes-Oxley new companies.
The Report states that policymakers and the media have misplaced their attention and instead should focus removing roadblocks to entrepreneurs.
The Report provides more background, data, charts, and analysis.
References
New Business, Not Small Business, Is What Creates Jobs – Nearly all net job creation since 1980 occurred in firms less than five years old. Carl Schramm, Robert Litan And Dane Strangler. WSJ, Nov 6 2009.
http://online.wsj.com/article/SB10001424052748704013004574517303668357682.html
Kauffman Foundation Analysis Emphasizes Importance of Young Businesses to Job Creation in the U.S. Press Release, Nov 5 2009.
http://www.kauffman.org/newsroom/kauffman-foundation-analysis-emphasizes-importance-of-young-businesses-to-job-creation-in-the-united-states.aspx
Where Will The Jobs Come From? Dane Stangler and Robert E. Litan. Ewing Marion Kauffman Foundation, Nov 5 2009.
http://www.kauffman.org/uploadedFiles/where_will_the_jobs_come_from.pdf