A new study examining the effect of net employment creation by startup businesses on state gross product was released today. Startup Businesses and the Growth of Real State Gross Product is authored by PRI senior fellow Benjamin Zycher, Ph.D. Dr. Zycher uses a sample of 49 states for the period from 1977 through 2010. His two-stage econometric model shows that an increase in net job creation by startups has a positive effect on state gross product. Each net job created by startup firms is estimated to increase state gross product by almost $1.2 million in a given year.
These findings combined with the existing scholarly literature on the effect of startup firms on net job creation suggest that policymakers should focus on both the ability of startup firms to establish themselves and to succeed, and the ability of startup firms to hire workers, Dr. Zycher said. He adds, It is clear that further policy reform is needed if U.S. startup firms are to achieve more of their potential in terms of actual hiring and the attendant benefits in terms of aggregate output. These policy reforms should include the following:
- A reform of such recent government policies as the Dodd-Frank financial services reform legislation that has had the effect of increasing the competitive advantages of large banking institutions over smaller banks, the latter of which traditionally have specialized in providing capital for new and small businesses.
- The Affordable Care Act (Obamacare) clearly has introduced rigidities, constraints, and incentives in the labor market that will lead to higher costs for labor force expansion, a substitution of part-time in place of full-time work, and other such perversities.
- Increases in the (real) minimum wage, whether mandated by federal or state legislation, will increase disincentives to hire.
- Current policies on immigration and work permits for foreigners have introduced serious rigidities into the labor market generally and for smaller businesses, startups, and particular sectors.
Dr. Zycher writes: These and other policy reforms would take advantage of the empirical reality that it is startup firms that are responsible for almost all net job creation in the U.S. economy, and would facilitate the hiring and the increased economic output that would result.