Brick City Blog: Job creation is about young businesses, not small businesses

Building off last week’s post about disturbing labor market trends, I want to look at some additional insights from John Haltiwanger’s research regarding job creation.

We hear commonly that small business is the engine of job growth in this country.  But, if you look at the numbers closely, the reality is more complex.  As we’ve previously discussed, the American small business sector is rather small compared to other developed economies.

And, there’s no doubt that small businesses have accounted for much of the job destruction in the recent recession.  Falling incomes and declining confidence from consumers has decimated many small retailers and restaurants — as we’ve seen in spades here in Chaska.

But when you think about it, many small businesses aren’t likely to be the engines of job creation.  The number of jobs in the local dry cleaners or a particular fast-food restaurant is going to be capped at some point.

Where the growth comes from is young businesses — large and small.  This is intuitive, if you think about it, and Haltiwanger has the data to back it up.  Young businesses tend to break down into three categories over their first few years — they either fail, they grow until they reach their natural limit (think of the dry cleaners), or they grow significantly and quickly.

One real problem we’re having in the economy is that business start-ups — the number of young businesses — are at historically low levels according to analysis done by economist Jared Bernstein.  That’s perhaps not surprising given the difficulties of the current economy and the challenges many entrepreneurs are having getting access to credit.  What’s more surprising, though, is that the rate of such start-ups has been falling for quite awhile, at least back to the year 2000.

Why is that?  Everybody has their list of reasons, including:

  • lack of availability of health care for entrepreneurs reduces incentives to strike out on one’s own
  • financial resources diverted to (and then lost in) the housing bubble
  • excessive wealth concentration has reduced the pool of entrepreneurs
  • excessive wealth concentration has reduced the overall demand level in the economy
  • regulations and taxes reduce the incentives to strike out on one’s own
Regardless of what you think about the causes, this is the framework in which we need to work on the solutions.  We need a more dynamic economy, we need to encourage start-ups — and particularly those that have the potential be in that third group:  those that can grown significantly and quickly.
We should expect our policymakers to end the notion that size is what matters in terms of encouraging job creation, and focus instead on the industries and types of firms that have the potential to grow significantly and quickly.  Focus on how we can encourage people to take the risk, and focus on how we can build the support — in the private and public sectors — to help these young businesses be successful.

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Comments (1)

  1. Submitted by Bert Perry on 10/18/2011 - 08:01 pm.

    It’s not a lack of health insurance alternatives that’s the problem–I can think of multiple places off the top of my head–but rather the fact that self-paid health insurance is 40% deductible from only income tax, and that only after you pay 7% of your income, while employer paid health insurance is 100% deductible against both income and FICA taxes. If you’ve got a family, that’s a big hurdle.

    Another hurdle; the estate tax. Work all your life to build even a modestly profitable business, and when you die your heirs get to have a fire sale to pay the tax. Warren Buffet has made a career out of going to those fire sales.

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