The Problem With Myths
That was 17 years ago. Since then, the study of job creation has blossomed. Today there are more researchers than ever, and they have a raft of new tools at their disposal, including new and improved sources of information and vastly superior technology with which to analyze it. You might think that, as a result, we know a great deal more about what it takes to create a business environment conducive to the growth and proliferation of gazelles. But we don’t—and the myth of small-business job generation is at least partly to blame. It is so deeply embedded in the consciousness of policy makers, politicians, and the general public that leading researchers feel compelled to keep debunking it.
John Haltiwanger of the University of Maryland is one of them. In 2010, he and two colleagues released a major study showing that the age of firms was a more important factor than size in identifying the job creators. “Mature” small companies lose more jobs than they create, while start-ups and young firms create most jobs but are “inherently volatile with a high exit rate.” His conclusion: Policies that target small companies without regard to age “will likely have limited success in improving net job creation.”
The Ewing Marion Kauffman Foundation subsequently published a series of studies making the same point, though with a stronger emphasis on start-ups and an explicit goal of influencing policy. “The politics have always been about small,” says Robert Litan who, until recently, was the foundation’s vice-president for research and policy. “But when you show that new jobs are actually coming from young companies, rather than small companies, that implies a whole different set of policies. It implies things like the Startup Act.” And indeed Litan and the Kauffman Foundation have worked hard to shift the government’s focus from small companies to start-ups. They were deeply involved in crafting the bipartisan Startup Act 2.0, which would make it easier for highly skilled immigrants, including entrepreneurs, to stay in the country; would exempt individual start-up investors from the capital gains tax; would accelerate the commercialization of federally funded research; and would reduce the regulatory burden on start-ups. Congress has yet to act on that bill but did pass, and the President signed, the Jumpstart Our Business Startups (or JOBS) Act earlier this year, intended to improve startups’ access to capital. The JOBS Act grew out of the President’s Startup America Initiative, launched with Kauffman’s help.
To the extent that such legislation removes ill-conceived obstacles to starting and growing companies, the economy should benefit from its passage. You can also make a case that the easier it is for people to go into business, the better off our society will be, and not just for economic reasons. That said, it’s far from clear how government policies favoring start-ups are any more likely to promote significant job generation than policies favoring small companies.
To begin with, the argument for both is based on a logical fallacy: Because a lot of the job creators are young (or small), we’ll have more of them if we have more young (or small) companies. In addition, some of the data is suspect. The jobs created by start-ups, in particular, can be deceptive, since their mortality rate is so high. If you look just at the number of jobs that start-ups create in the year they’re born and then you keep adding jobs created by start-ups in subsequent years, it will appear that start-ups account for all net new job creation. As researcher Tim Kane concluded in one widely cited Kauffman study, “…start-ups aren’t everything when it comes to job growth. They’re the only thing.”
But Kane’s methodology exemplifies what Mark Twain had in mind when he wrote about “lies, damned lies, and statistics.” Using his approach, every start-up could go out of business in its second year and it would still appear that start-ups had created more jobs than existing businesses. (In the second year, the previous year’s start-ups become “existing businesses,” and thus the jobs lost by those former start-ups are deducted from the latter’s total.)
Nevertheless, there’s ample evidence that companies aged one to five account for a large percentage of the net new jobs each year—almost two-thirds of them in 2007, according to another, more solid Kauffman report, Where Will the Jobs Come From?, by Litan and Dane Stangler. The question is, so what? Young companies don’t create jobs because they’re young, any more than small companies create jobs because they’re small. Moreover, as Birch demonstrated back in 1994, and as has been repeatedly corroborated in the years since, a relative handful of small companies or young companies—the gazelles—are responsible for the great majority of net new jobs created by each group, and the companies that create the most new jobs aren’t necessarily either small or young.
What we don’t know is why one company becomes a gazelle and another doesn’t, or why some gazelles keep creating jobs and others stop. Nor do we know the obstacles that are common to gazelles and impede their growth. Worse, we don’t know the reason for the most troubling element in the entire job picture: Why the percentage of growing companies has fallen over the last ten years. And we’re just beginning to learn what new government policies could improve the situation—and what current policies are making matters worse.
Statistics and theory can’t help with these questions. They require boots on the ground.
