A much larger fraction of entrepreneurs expects to create jobs than actually do. This difference means that policy makers need to take entrepreneurs’ job creation plans with a grain of salt.
The Global Entrepreneurship Monitor (GEM), a consortium of university researchers around the globe who track entrepreneurial activity, “defines high-growth entrepreneurs as those who expect to have 20 or more employees (other than the owners) within the next five years.” By that definition, 17 percent of Americans founding a company expect to have a “high growth company,” as the figure below shows:
Expected and Actual Job Creation
This percentage is much higher than the share of entrepreneurs that actually has a high growth company. According to Census’s Business Dynamics database, only 2 percent of five-year-old companies have 20 or more employees.
Moreover, this number overstates the share of new businesses that are “high growth.” Census data show that slightly less than half of new businesses survive to age five. Adjusting the share of surviving five-year-old businesses with 20 or more employees by the failure rate of new companies reveals that less than 1 percent of businesses started in a given year have 20 or more employees at the time of their fifth birthday.
If only about 1 out of every 20 entrepreneurs who expect to employ 20 or more people when their businesses are five years old actually does so, then entrepreneurs are overoptimistic about their job creation capabilities, just as they are about the survival, sales and profits of their businesses.
Policy makers should respond to this over-optimism the way investors do – by discounting entrepreneurs’ projections.
While investors might focus their discounting on entrepreneurs’ estimates of sales and profits, the principle is the same for policy makers and estimates of job creation.