[qi:_foundread] Startups may have a high failure rate, but they also are a leading driver of job creation in the U.S., according to a report put out by The Kauffman Foundation this morning. As part of a deeper look at what small business means for the U.S. economy, the study found that 1- to 5-year-old companies create the highest average number of jobs, at roughly four jobs per year. From the report:
The dynamics of firm age, moreover, point us away from a discussion on the existing distribution of employment and toward a focus on the annual changes in jobs. Let’s ask not where people work, but where each additional increment in net job creation occurs. This approach immediately forces one to recognize that companies in a given size class are not necessarily homogenous: a company with fifteen employees that is twenty-five years old will behave differently than one that is only two years old (differences that will multiply if we classify firms according to economic sector).
First the report points out that, while companies with more than 500 people make up about half of the nation’s employment and payroll, a business’s size is not a good indicator of where new jobs come from. Dane Stangler and Robert E. Litan, who wrote the report, offer up this graph to show that without startups overall job creation in the U.S. would have been negative in most of the years since 1977.
There’s also discussion, but no data, about how M&A at large companies — through which they typically acquire smaller, younger firms — accounts for the job growth at larger companies. The report offers a ton of data about economic sectors, and acknowledges that relying on startups for job creation is both messy and hard to track. It’s all very well to say at a macro level that young companies create jobs even though they have a high likelihood of failure, but at the individual level, relying on an uncertain startup for employment can create enormous personal risk.
The report recommends that to foster job creation, young companies need help. The authors think credit should be made more accessible to businesses as well as banks, and note efforts happening in these area today. They also suggest a payroll tax holiday for new and young businesses, while noting that such a move could add to the deficit.
I would suggest rather, that the government consider some level of universal health care that would reduce costs for a young company, as well as offset the difficulties faced by employees who have to navigate the turbulent nature of working at a startup. Overall, it’s an interesting report, although I’m not sure big business should be written off so easily. They may not be engines of job growth, but in many cases they are engines for startup growth as they buy services, equipment or even ads from them.