Last Friday’s announcement that the United States unemployment rate is down to 3.9% is great news for the American economy. In addition to the national unemployment rate being at its lowest since 1969, only seven states have unemployment rates above 4.6% - the number used by economists to measure “full employment”.
On the other hand, according to the Center for Economic and Policy Research, wage growth has been weak - only 2.6% year-over-year, and this month’s drop in unemployment was due to 236,000 Americans leaving the workforce, not from employers creating jobs. For many economists, low unemployment, combined with low wage growth and reduced job mobility, implies that people are running in place – not switching jobs, but not getting ahead where they are.
Developing a more inclusive job creation strategy will be an important political issue in 2019 and 2020. There are several reasons for this. First, the rest of the world is building its capabilities to commercialize new technologies and innovations. This has always been America’s competitive advantage, but over the last decade, competitor nations have invested heavily in life sciences, artificial intelligence and other emerging technologies. We are doing great, but others have started to do great things themselves. Secondly, states are reassessing their race-to-the-bottom strategies to recruit companies through giveaways in the aftermath of Amazon’s New York HQ2 debacle and the unrealized gains of Foxconn’s deal with Wisconsin. And thirdly, companies are most driven to automate tasks when there aren’t workers to complete them – whether its because they can’t find them (today), or because they can’t afford them (recession). The effects of that automation will be felt most acutely in times of recession or slow growth.
So who is creating jobs in America? Earlier this year, the Congressional Research Service released an analysis on private-sector job creation in the United States for the Small Business Administration. The report provides some important insights, and refutes some common notions about where job creation is occurring.
The CRS’ research suggests that startups play an important role in American job creation, but only over time, because fewer than half of all startups in America are still in business after five years. This aligns with research from the Harvard Business School Rock Center for Entrepreneurship that nearly 75% of startups fail in their early years. Startups with fewer than 20 employees tend to have a negligible effect on net job creation until they pass the 5-year post, whereas startups with over 20 employees tend to have a positive employment effect as soon as they pass the 20-employee mark and complete their first year. While it is not differentiated in the report, the distinction is between startups that raise private capital, such as venture capital, and those that don’t.
The SBA study also looked at business formation data from 1994-2006 to conclude that larger startups, with 20-500 employees, have the greatest effect on job creation in Years 1-5, before moderating. The authors of the cited studies concluded that larger small businesses and startups were “able to increase their level of productivity sooner after entry” than startups with fewer than 20 employees, because they had products in the market and better access to capital, and, as a result, were in a better position to “challenge existing firms and increase the competitiveness of surviving existing firms”. A 2012 study, reviewed by CRS, using U.S. Census Bureau employment data from 1998 to 2011 concurred that the age of a business is the most important factor in the number of jobs it creates.
The CRS study calls these growing startups “high impact”. High-impact businesses are defined as “having sales that have doubled over the most recent four-year period and have an employment growth quantifier of two of more over the same time period”. While high-impact startups account for only 5-6% of all businesses with employees, they seem to account for “almost all [net] job creation in the economy”. In addition, these high impact startups exist in all regions and states, although they tend to be close to urban centers, and are relatively evenly distributed across all industries - regardless of the vibrancy of the industry they are in. Large companies with over 500 employees have only accounted for about 30% of American job gains since 2011.
There are some important implications for this report. Since 2009, US policy to promote entrepreneurship has been primarily focused on early-stage innovation. The US government launched, and continues to support, some important programs to commercialize federally-funded research, such as the US Department of Commerce Regional Innovation Strategies and the National Science Foundation’s I-Corps program.
But perhaps federal resources – such as technology transfer, SBA loan programs, research grants or other programs, should focus on the high-impact startups that have survived their first years and are actually creating permanent jobs. For example, the National Institute of Standards and Technologies (NIST) recently released a set of recommendations to improve technology transfer in the federal government. The US government provides about $50 billion annually to federal research labs directly, and NIST has made a series of important recommendations to make it easier for entrepreneurs, investors and corporations to access research at federal labs and commercialize it. In light of the SBA analysis, perhaps NIST and other federal agencies can focus some of their programs beyond early-stage commercialization and find stable startups that can license technology, or are more likely to succeed in transforming a good innovation into a product or service than an early-stage startup.
Across America, cities, states and regions have spent the last decade transforming their economic development strategies to emphasize local entrepreneurship, university partnerships and local small business support (except for the whimsical crusades to land Amazon HQ2). Perhaps those efforts should also enter Version 2.0 – with less focus on startup accelerators and co-working spaces and more emphasis on helping locally-based, high impact firms to get to the next level of their growth. For government, high-impact firms are also less politically risky to support and more likely to stay in the neighborhood.
