‘Small business” is the recipient of much official love (as well as heavy regulatory intrusion), but it receives its loudest applause as the supposed source of most employment growth.
Alas, that conventional wisdom is incorrect: The modern scholarly literature finds that it is new (not small) businesses startups that contribute disproportionately to job creation.
Job creation obviously is important, but ultimately it is economic growth that is of central concern; it is a growing economy that yields the increased wealth from which we derive higher living standards, upward mobility, and improved health and life expectancy.
And so the job creation driven by startup businesses while crucial underscores a larger question: What is the effect of employment by startups on economic growth?
A new Pacific Research Institute paper provides an answer: Based upon a dataset of 49 states for 1977-2010, each job created by startup firms is estimated to increase state gross product by almost $1.2 million in a given year. In short, the creation and survival of startups is crucial for job creation, and that job creation is an important component of economic growth.
These findings combined with the existing scholarly literature on the effect of startup firms on 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 expand their hiring.
Such policy initiatives as the Kauffman Foundation Startup Act can be predicted to increase the ease with which startup firms can be established; this would strengthen the ability of the startup sector to create employment opportunities.
But it is clear that further policy reform is necessary 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. Such reforms might include the following:
An overhaul of such recent government policies as the Dodd-Frank financial services reform legislation, which 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 perversities. The severe ACA implementation difficulties now emerging provide a good opportunity for Congress to reform the law so as to remove the disincentives for job expansion, even abstracting from the opportunity to avoid the prospective adverse effects of the ACA on the health care sector.
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 specific sectors in particular. A reform that expands the pool of available high-skilled workers, allows available laborers into the formal work force, and removes artificial rigidities that hinder hiring would strengthen economic growth.
These and other policy reforms would take advantage of the empirical reality that it is startup firms that are responsible for almost all job creation, and would facilitate that hiring and the increased economic output that would result.
Zycher is a senior fellow at the Pacific Research Institute.