New Research Says Startups are Most Important Vehicle for Job Creation

The New York Times has been giving startups some serious love lately, from recent Thomas Friedman op-ed's to yesterday's article reporting on new research that suggests that startups are the most important vehicle for job creation in the American economy. The study has important implications for everything from tax policy to education.

In the story of the United States, both entrepreneurship and small business have almost mythic importance. The country was of course, founded by business and civic entrepreneurs who risked everything for the chance at a better life and a better government in a new world. Small businesses have a prominence that derives not only from their economic impact, but for the fact that they seem to be the place where Americans can claim the freedom and independence promised in the American Dream.

But this mythology matters beyond its inspiration for the masses. Policymakers are charged with creating regulatory frameworks that lead to more businesses and more job creation. Put another way, they're tasked with understanding where myth meets reality and designing policy structures that enable more economic growth. People who advocate for policies friendly to small business are quick to point out that 2/3 of new jobs are created by firms with under 500 employees.

In August, the National Bureau of Economic Research published a research paper that made some important suggestions about where new jobs really come from. In short, the report suggests that the size of companies does not matter when it comes to job creation -- what matters is age. The research suggests that most job creation occurs in the early years of new companies.

Why does this matter? It matters from a policy perspective because the things that establishes small businesses care about are often different than the things that startups care about. Creating policies and structures that enable ecosystems which promote entrepreneurship and new venture creation is a task wholly distinct from supporting small business.

The article mentions a few examples of where government policy aimed at promoting job creation through small businesses don't help startups very much. Programs to spur bank lending, for example, don't matter terribly to startups who are primarily financed through equity investment (which effectively means selling a portion of their company, rather than incurring debt). Another example is the focus on individual income taxes -- something the small business sector in general cares a lot about, but which your average startup and its early employees care far less about. Instead, startup ecosystems are worried about things like a rise in capital gains tax, which could reduce incentives for early stage investors.

Mythology matters. The stories we tell about ourselves and our society create the aspiration that catalyzes new careers and companies. But data matters as well. And when it comes to policy, data matters even more. The government should not turn its back from policies which help small businesses, but this data also suggests that it shouldn't assume that those policies are the vehicle which will create the jobs of the future.

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