It's an accepted and well-circulated meme that small businesses are the drivers of economic growth, creating most of the jobs that keep the nation humming.
Confirming the trope, nearly every politician since Ronald Reagan has paid lip service to the idea that entrepreneurship is the bedrock of the American Dream. In January, for example, President Obama mentioned the importance of small businesses as innovators and props to the economy in his State of the Union address at least half a dozen times. Various agencies, such as the Small Business Administration, also perpetuate the idea, saying small businesses have created nearly two-thirds of net new jobs since 1993.
But the conventional thinking is also a bit misleading. It turns out the biggest job creators are actually big businesses, followed by startups. Over the past 10 years, the former have been responsible for the most net job increases. Meanwhile, startups create and destroy more new jobs every year than any other group.
So if you're thinking of starting a business, congratulations. It's possible you'll be part of the group that's having the biggest impact on the economy and creating new jobs. (That's especially true of technology companies, which tend to have higher rates of new business formation.) And if you're fresh out college, you might do well to look hard at startups for your next job, not only because they need your talents, but also because research suggests that's where the jobs are, and they're likely to pay you better than a big company.
But don't listen to me. Listen, instead, to serial entrepreneur Al Goldstein, 34. In the past decade, Goldstein's three businesses, which include the subprime lender Enova, which he started a year after graduating college in 2004; real estate site and Inc. 5000 company Pangea Properties, and 2015 30 Under 30 listee lender Avant, have added 2,200 new jobs to the economy.
"The fun part of my job is being able to see these people grow," Goldstein says.
That includes his Avant co-founders Paul Zhang, 28, and John Sun, 30, both of whom started out as college interns at Enova, then transitioned into full-time employees, before striking out on their own to start Debteye, a personal financial management software company in 2011. That eventually became Avant, where the trio currently work together.
"The awesome part of working for a startup is not having as well-defined a roll as you would at a larger company," Sun says of his early years at Enova. "You're learning to think for yourself, and what the right things are for yourself, and how you can contribute to the success of the company."
Sun is currently the chief credit officer at Avant, and stood out early to Goldstein at Enova by developing an alternative risk-scoring system for the company's loans, Goldstein says.
Job growth by the numbers
Before we get carried away with how critical startups are to the economy, however, let's take a peek at the data.
In gross numbers, big businesses have shown the largest job increases over the past two decades, according to the Bureau of Labor Statistics.
From 1994 through the third quarter of 2014, companies with 1,000 employees or more added nearly 34 million workers. Over the same period, they also laid off more than 33 million workers, for a net gain of 617,000.
By comparison, the very smallest companies, those with fewer than five employees, which include most startups, added 30.6 million workers. They also lost 30.7 million workers, for a net loss of 87,000.
"Big companies and young, fast-growing companies provide more jobs," says Jordan Bell-Masterson, a research analyst at the Kauffman Foundation, the entrepreneurship research and grant-making organization.
However, startups are by nature risky, often tackling new, unchartered territory, so they tend to be more volatile job providers. "Young businesses will also be big job destroyers," Bell-Masterson says.
In terms of net new jobs, an indicator of economic expansion since they are jobs that had not previously existed, it's really startups that have the biggest impact, according to Kauffman research. Over the past three decades, companies less than five years of age have added an average 1.5 million new jobs annually, while older firms have tended to just shed jobs.
Better pay for young workers
Meanwhile, startups tend to hire more younger workers, and pay them better, research suggests. About one-third of workers at firms less than five years of age are between 25 and 34 years old, and 70 percent are under 40, according to a 2013 study by University of North Carolina, Chapel Hill, and the Federal Reserve Board. (The numbers are nearly reversed for older, more established firms, which tend to have more older workers.)
By way of pay, while the average worker at a startup earns about 6 percent less than a worker at a more established firm, the youngest workers earn about 3 percent more than they do at older firms. Older workers, in contrast, are paid about 10 to 25 percent less at young firms, because they are likely to be taking more senior positions that would be more highly compensated at larger firms in exchange for equity in a startup.
"There is less income disparity between leadership and new employees at startups," says Sun, who notes that that also includes Avant. (Goldstein says that startup culture, with its long hours and potential for 100-hour weeks, is a natural fit for many young workers, but might not be for everyone.)
Nevertheless, the U.S. is becoming less entrepreneurial with each passing year, with fewer and fewer startups, according to recent research. And that might not bode well for the new job creation everyone is depending on to repair the damage done to the U.S. economy by the latest recession.
The rate of new firms entering the marketplace has fallen by nearly half over the 40-year period from 1978 to 2012, to 8 percent, compared with a steadily increasing rate of new firm closures, up two full percentage points, to about 10 percent, over the same period, according to the Brookings Institution, a policy think tank.
After reaching a peak in 2000 at 634,000, the annual number of new firms fell to 505,000 in 2010, the last year for which BLS has data. The gross number of jobs they've created in the 20-year period from 1994 to 2010 also dropped by nearly 50 percent, to 2.5 million.
Still, from where Goldstein sits, he can't find enough qualified employees fast enough to fill his job openings, primarily for engineers. He says he has 25 open engineering positions, and would hire double that number if he could find enough qualified people. In that regard, he's competing with just about every other growing technology company out there.
To support growth, what's needed is earlier educational opportunities for young engineers, starting in junior high school, Goldstein says, as well as increases to the H1-B visa caps, for qualified foreign workers.
"It could really put steam behind the economy if we could hire those engineers more quickly," Goldstein says.