Entitled “The Importance of Startups in Job Creation and Job Destruction”, the study bases its findings on the Business Dynamics Statistics data that tracks the annual number of new businesses (startups and new locations) from 1977 to 2005 in the USA. The study defines startups as firms younger than one year old.
The study reveals that, both on average (and for all but seven years between 1977 and 2005), existing firms are net job destroyers, losing 1 million jobs net combined per year.
By contrast, in their first year, new firms add an average of 3 million jobs.
Further, the graph above shows, whilst job growth patterns at both startups and existing firms are pro-cyclical, existing firms have much more cyclical variance. Most notably, job creation at startups remains stable during recessionary years, while net job losses at existing firms are highly sensitive to the business cycle.
According to the study’s authors,
“These findings imply that America should be thinking differently about the standard employment policy paradigm. Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”
“Because startups that develop organically are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail….such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models.”
Given that he is exceptionally busy during this week of all weeks, I am grateful that this entrepreneur, a man I admire enormously, took the time to send me the reference.
It will, along with other data collected, help with constructing an alternative to the current economic strategy.
More importantly, it demonstrates, yet again, the lack of analysis that has gone into the Economic Renewal Programme and the seemingly total reliance of senior civil servants in the Department for Economy and Transport on the CBI, and their penchant for "anchor companies", for any policy direction.
