Start-ups and Job Creation 
Dean Baker
CEPR
June 17, 2012
http://www.cepr.net/index.php/blogs/beat-the-press/start-ups-and-job-creation

There was a lengthy and pointless debate that began in
the early 90s over what sized businesses created the
most jobs. The original story was that small businesses
created the most jobs. This turned out not to be true on
more careful investigation, since small businesses also
lost the most jobs. There were various twists and turns
in the academic literature before most economists came
to the conclusion that businesses of all sizes on net
create jobs at roughly the same rate.

While this debate kept many economists employed and no
doubt helped to boost wages in the profession, it did
little to advance our knowledge of the economy.
Unfortunately economists learn little from such
experiences.

We now have the sequel to this silliness with the claim
that it is new businesses that create jobs. This claim
emanates most prominently from the entrepreneurially
oriented Kauffman Foundation 
[http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CIUBEBYwAA&url=http://www.kauffman.org/&ei=otXdT6mYJaS26QGh8dCVCw&usg=AFQjCNF2zAdePaHkIa8vBOP9rHpRFxRiaQ&sig2=Zw29dj4fPIf6x0XyfpUOlQ].
It was picked up in an Ezra Klein column 
[http://www.washingtonpost.com/blogs/ezra-klein/post/saving-students-from-the-meta-economy/2012/06/15/gJQAjughfV_blog.html] 
yesterday. The argument coming from this direction is
that all the job growth in the last three decades came
from new businesses. Employment in firms that existed in
1980 has just stayed roughly even.

The reason this claim is silly is that the decision of a
corporation to expand and open a new division depends to
a large extent on the ease with which new businesses can
form. If it is easy for start-ups to form, then existing
businesses will be less likely to expand their
operations by setting up a new division. If they want to
get into a new area, then they will just buy a start-up
that looks promising.

The logic here is simple. The vast majority of start-ups
will fail. However if there are a large number, then
certainly some will succeed. The ones that do can then
be purchased by existing companies that want to expand.
The new jobs can then be attributed to start-ups and not
existing businesses, but this is entirely due to the
fact that we make it easy for start-ups to form.

An example of this story is Google's acquisition of
Youtube. The fact that there was a successful start-up
that Google could buy made it easier to enter this
market. But does anyone think that Google would not have
moved itself in a similar direction had Youtube not
existed?

The point is that even if we accept that all net new
jobs came from start-ups it does not follow that we
necessarily want to do more to encourage start-ups nor
adopt any policies that have a negative impact on
existing businesses to favor start-ups. The reason why
the former is not true is that the vast majority of new
businesses fail within a decade. It is reasonable to
assume that the marginal start-up (the ones we encourage
with our new more start-up friendly policies) will be
less successful on average than the current group that
did not need this extra boost from the government.

This means that we will possibly be encouraging millions
more people to take their life's savings, work
ridiculously long hours, usually dragging in other
family members, in pursuing a venture that will fail. We
will then see the person without a business, without
savings and without a job and just a few years left to
retirement. That doesn't sound like good policy, nor is
it a good use of the economy's resources.

On other side, suppose we tilt the playing a field a bit
to favor new businesses at the expense of existing
businesses. Well, if we accept the Kauffman analysis,
imagine that instead of holding their own existing
businesses had lost 5 percent of their jobs over the
last three decades. That would give us a really big
hole. Would the additional tilt to new businesses fill
this gap? We don't know -- at least the Kauffman data
don't answer this question.

The long and short is that new businesses are wonderful,
but policies that go overboard to push people to start
new businesses are likely to ruin many lives and lead
their promoters with lots of egg on their face.

___________________________________________

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