November 28, 2014

Another Misunderstood Fact About the Job Market

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In a piece entitled, “What May be the Most Commonly Misunderstood Fact About the Job Market,” Jared Bernstein challenged a claim made on the Diane Rehm show by Brad Close, NFIB Vice President for Public Policy. Mr Close said that most Americans are employed in small businesses.

Mr. Bernstein is right that Mr. Close is wrong. Slightly more than half (50.6 percent) of the private sector labor force is employed in companies with fewer than 500 employees – the SBA’s definition of a small business. Moreover, if you include people who work outside the private sector, employment in companies with fewer than 500 employees was only 39 percent of the civilian labor force (and 41 percent of employed civilians) in 2008, the latest year for which the data on small business employment are available.

But, ironically, in correcting one error, Dr. Bernstein introduces another. In his post, Mr. Bernstein writes, “[R]esearch shows that it’s surviving startups that are particularly important in terms of generating new jobs.” That turns out not to be true.

As I wrote here last year, young companies are net job destroyers. As I explained in my earlier post, “The act of firm formation accounts for most of the net job creation in the economy. Separate out firm formation from the operation of young firms and one finds that young firms – those aged one to five – turn out to be net job destroyers. In fact, they destroy more net jobs than older firms.”

While the new-business-as-the-primary-source-of-net-job-creation argument may rest on a mathematical artifact – existing firms can create and destroy jobs, but new firms can only create them – the data still negate Dr. Bernstein’s argument that surviving start-ups are particularly important in creating jobs. Surviving young firms do not create enough jobs to make up for those lost by dying and shrinking young companies.

Moreover, the survivors weren’t even particularly potent job creators when they were first founded. As I have shown elsewhere, new businesses that die within five years create more jobs at founding than new businesses that survive five years.

The confusion about who creates jobs may be why Milton Friedman saw small business job creation statistics as among the biggest fallacies being portrayed as “facts” in economic policy discussions.

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

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