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February 15, 2013
Promoting Job Creation: Don't Forget the Old Guys
In a provocative article posted this week, the American Enterprise Institute's James Pethokoukis concludes that the state of entrepreneurship in the United States is, disturbingly, weaker than ever. In particular, Pethokoukis documents a decline in jobs created by establishments less than one year old, a trend that began before the 2001 recession and has continued more or less unabated since. He specifically cites the following symptoms of trouble:
- Had small business come out of the recession maintaining just the rate of start-ups generated in 2007, according to McKinsey, the U.S. economy would today have almost 2.5 million more jobs than it does.
- There were fewer new firms formed in 2010 and 2011 than during the Great Recession.
- The rate of start-up jobs during 2010 and 2011—years that were technically in full recovery—were the lowest on record, according to economist Tim Kane of the Hudson Institute.
That last point appears to be all the more ominous given this observation from Tim Kane:
"...that startups create essentially all net new jobs. Existing employers, it turns out, tend to be net job losers, averaging net losses of 1 million workers per year."
Pethokoukis makes his case with political commentary that we don't endorse and don't find particularly helpful. But we won't argue with his conclusion that more entrepreneurial start-up activity would be a good thing. Nonetheless, we get a little concerned when the conversation jumps from data on net job creation and the role of start-ups and early life-cycle firms, and moves on to policy conclusions that seem to disproportionately focus on that class of businesses specifically.
Here is the source of our concern: Though it is also tempting to lump all "existing employers” into the basket of net job destroyers, there are existing firms that create jobs, and a few are doing so on a very large scale.
Take 2006, for instance. Based on data from the Commerce Department called Business Dynamics Statistics (BDS), new firms (businesses with a payroll that existed in March 2006 but not in March 2005) had about 3.5 million employees. This is the large net job creation by new firms reported by Kane. However, over the same year, expanding firms more than 10 years old added a whopping 11 million jobs—about three times as many jobs as created by new firms. Of course, some older firms were downsizing or closing—contracting mature firms destroyed an estimated 10 million jobs. So the net number of jobs created by older established firms looks somewhat less impressive than the record of those young start-ups. But in the overall picture, were the 11 million jobs created by the expanding older businesses really less important than 3.5 million created by the newbies?
It turns out that older firms also account for a large fraction of the job creation occurring in fast-growing firms, arguably a better characterization of entrepreneurism than newness. We found some compelling evidence reported in recent research by Akbar Sadeghi, James Spletzer, and David Talan. Using data from the U.S. Bureau of Labor Statistics' Business Employment Dynamics (BED), Sadeghi, Spletzer, and Talen find that older firms (those at least 10 years old) accounted for more than 40 percent of the employment created by high-growth firms (those with at least 20 percent annual employment gains between 2008 and 2011). A similar conclusion about the role of older, fast-growing firms is found in this earlier Kauffman Foundation report based on BDS data looking at the 1 percent of fastest-growing firms in the United States.
The point is not that start-up entrepreneurial activity is unimportant. It is vitally important. But in larger terms, we should recognize that all entrepreneurial activity is important, no matter what the age of the firm in which it occurs. Atlanta Fed President Dennis Lockhart highlighted this point in a speech delivered earlier this week at Instituto de Empresas in Madrid, Spain:
My bank's experience in trying to understand the role of small businesses, small-growth businesses, young businesses, and mature-growth businesses in job creation illustrates a key point, I think. In the pursuit of economic growth and increased employment, there is no silver bullet. Rather, the policy community should be pursuing an effective mix of policy elements (with focus in areas such as new business formation, labor rules, and regulatory efficiency, to name a few) that together catalyze a virtuous circle of innovation, growth, and employment.
Certainly, entrepreneurial risk-taking, whether by large, mature businesses or start-ups aimed at becoming growth companies, is part of the solution.
When it comes to promoting job creation, forgetting to throw mature businesses into the mix with start-ups is surely not the path to finding the best policy solutions.
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