Conventional wisdom says that small business is the engine driving the U.S. economy. What conventional wisdom doesn’t tell you is that it’s not existing small businesses, but brand-new ones that grow jobs at the greatest rate, according to a new study.
It’s true that small businesses employ more than half of the private sector worker force, according to the Small Business Administration. But new job generation is being led by the startup sector.
Though they only account for 3 percent of total employment, startups generate almost 20 percent of gross job creation, according to “Who Creates Jobs? Small vs. Large vs. Young,” a National Bureau of Economic Research (NBER) working paper by John C. Haltiwanger, Ron S. Jarmin and Javier Miranda.
When it comes to stimulating job growth, Haltiwanger, a professor of economics at the University of Maryland, said the age of a company is a better indicator than its size in predicting its contribution to creating new jobs. Youth trumps size. So much for conventional wisdom.
“Startups tend to be small,” he told BusinessNewsDaily. “They contribute disproportionately to jobs. Small, mature businesses are not significant generators of new jobs.”
The NBER study’s findings emphasize the critical affect startup companies have on U.S. employment growth dynamics. The authors documented a rich “up or out” ecosystem that young firms inhabit and compete in.
What is it about startups that make them new-job dynamos?
“We grow by reinvention,” Haltiwanger said. “A healthy feature of the U.S. economy is that there’s all this reinventing all the time. It’s hard to reinvent continuing businesses. Startups are the ones who are the more nimble ones in terms of trying new things.”
That startups generally start with a clean slate and have to invent themselves from the ground up may be a significant factor in their ability to disproportionately grow jobs . And, unlike their larger brethren, they don’t have to fight a legacy of “not invented here” sentiment that constrains them from trying the new and different.
Haltiwanger said reinvention is not impossible for large companies. But the question of whether their reinvention is driven more by crisis or opportunity is still open.
“There are successful businesses that find ways to reinvent themselves,” he said. But it often takes place in a climate of crisis, such as the largely successful reinvention of the U.S. auto industry.
There is a dark side to the disproportionately high growth rate shown by startups, however. Startups also destroy the most jobs.
“They are highly volatile,” Haltiwanger said. “More than half of them are gone in five years.”
For those that survive that initial fish-or-cut-bait battle for survival, though, the prognosis is positive.
“Those that do survive, grow much faster than their larger, older competitors, “ he said. “Their productivity is off the charts as well. “