Small-Business Research--Job Detection

An urban economist offers a way to identifying start-ups and counting the jobs they create.

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What's the state-of-the-art method of identifying start-ups and counting the jobs they create? You do it the old-fashioned way: one company at a time

The people and companies creating America's new economy are a mystery to even the most ardent observers. The media and the nation's political elite focus stubbornly on the now rapidly decaying world of mammoth enterprises -- defense contractors in California, automakers in the Midwest, lumbering computer manufacturers in Boston, or struggling national retailers. As the transformation of America from the New Deal-era economy picked up steam over the past decade, the gap between official statistics and shop-floor realities has reached staggering proportions.

Take California, for example, where the inadequacy of conventional market measures has repeatedly forced officials to reinvent their views to an almost comic degree. Because California's employment data were historically derived from surveys of only a few large firms, the state Employment Development Department (EDD) recently discovered that it had wildly overestimated the state's job losses since 1989. When smaller, more robust firms were factored into the data, California's job loss totals declined dramatically from the 1.2 million initially reported to approximately 500,000 -- a result that sent banks and investment analysts scurrying to upgrade their appraisals of the state's future prospects.

Further evidence of how the state's new economy was not registering in official data came in October 1994, when an unprecedented disparity emerged between EDD surveys and employment figures compiled by the state Department of Finance. Once highly complementary, the two databases showed either that California had lost 17,000 jobs for the month or that it had gained an incredible 229,000 positions. Few could deny that something was going on that official statistics simply couldn't grasp.

In an effort to overcome such problems, then Los Angeles Economic Development Deputy Mayor Linda Griego -- now the head of Southern California's postriot recovery organization, Rebuild L.A. (RLA) -- commissioned a pilot project in 1992 to re-examine the region's new economy in six sectors: entertainment, textiles, environmental engineering, biomedical, computers, and metalworking. Completed in 1994 with the support of the city of Los Angeles and AT&T, the New Economy Project provided a startling glimpse of how, even in recession-wracked Southern California, the new economy was silently fashioning dynamic industries from the old.

Defying the conventional wisdom that industry had either fled or died out in the region, the project recorded an astounding 18,000 companies in the six sectors, employing more than 376,000 people and generating revenues of close to $54 billion. Average start-up rates in the 1990s kept pace with those of the 1980s -- a period of record expansion for greater Los Angeles. Wage rates in all of the focus industries, except textiles, vastly exceeded the California mean and were among the highest in the country.

Learning about what was happening to the companies and individuals involved in the new economy proved remarkably difficult. As in other parts of the country, official industry directories, employment data, and prevailing economic perspectives obscured industrial reality. Furthermore, many key players didn't want to be discovered. Finding the new economy required novel ideas about how and where to look for industrial activity.

One-Dimensional Thinking, Multidimensional Firms
The chief lesson of the New Economy Project is that understanding complex regional industries requires abandoning conventional notions about industrial organization. Politicians and academics, for example, routinely speak of "high" and "low" technology and "service" or "manufacturing" businesses, and they use broad classifications such as "defense," "electronics," or "computer" industries. Vast state and national bureaucracies compile economic statistics to reflect those categories.

Those time-honored notions are dangerously misleading in the new economy. In the more stable New Deal era, larger companies housed the most sophisticated equipment and technology, and smaller firms provided labor-intensive, uncomplicated products or services. The boundaries of entire industries seemed self-evident.

But the turbulent markets of the '80s and '90s put a premium on firms that were developing particular skills and adapting knowledge to as many uses as possible. Smaller firms mastered particular tasks and applications to a degree few others could match. They then learned to educate a growing number of customers about how to profit from their specialized capabilities in an enormously diverse range of markets and industries.

The result is an economy that defies standardized industrial classifications. Constantly shifting alliances of specialized vendors, designers, and marketing experts increasingly blur once-inviolate industry lines.

From the start, researchers in the New Economy Project observed how this new economy had transformed the structure of U.S. industry. They found, for example, entertainment-prop or high-resolution-lighting manufacturers officially coded as "motion-picture-service" providers that were actually far more involved in advising global retailers on how to create shopper-friendly in-store environments or in designing architectural lighting schemes for major metropolitan areas. Seemingly mundane "printed-circuit-board" producers turned out to be sophisticated engineering consultants, teaching mammoth supercomputer makers how to construct CPUs to increase reliability.

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