Samuelson: Startups Create Most New Jobs

Photos: A Peek Inside the Idea Factory

If you're interested in job creation—and who isn't these days?—you should talk to someone like Morris Panner. In 1999, Panner and some others started a Boston software company called OpenAir. By 2008 they sold it for $31 million. The firm had then grown to about 50 workers. It turns out that entrepreneurship (essentially, the founding of new companies) is crucial to job creation. But as Panner's experience suggests, success is often a slog.

What's frustrating and perplexing about the present job dearth is that the U.S. economy has long been a phenomenal employment machine. Here's the record: 83 million jobs added from 1960 to 2007, with only six years of declines (1961, 1975, 1982, 1991, 2002, 2003). Conventional analysis blames today's poor performance (jobs are 7.6 million below their pre-recession peak) on weak demand. Because people aren't buying, businesses aren't hiring. Though true, this omits the vital role of entrepreneurship.

In any given year, employment may reflect the ups and downs of the business cycle. But over longer periods, almost all job growth comes from new businesses. The reason: high death rates among existing firms. Even successful firms succumb to threats: new competition or technologies; mature markets; the death of founders; shifting consumer tastes; poor management and unprofitability. A company founded today has an 80 percent chance of disappearing over the next quarter century, reports a study by Dane Stangler and Paul Kedrosky of the Kauffman Foundation.

True, some blue-chip firms—the Exxons and Procter & Gambles—endure. Four fifths of the Fortune 500 were founded before 1970. But they are exceptions, and many blue chips have died: Pan Am (once the premier international airline), Digital Equipment (once the second-largest computer maker), and Circuit City (once a leading consumer-electronics chain).

The debate over whether small or big firms create more jobs is misleading. The real distinction is between new and old. American workers are roughly split between firms with fewer or more than 500 employees. In healthy times, older companies of all sizes do create lots of jobs. But they also lose jobs, as some businesses shrink or vanish. On balance, job creation and destruction cancel. All the net job increases occur among startups, finds a study of the 1992–2005 period by economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau.

To be sure, entrepreneurship has a downside: booms and busts. Remember the dotcom "bubble." But more damaging, says Panner, are widespread popular misconceptions about what it is and isn't.

Start with the Blockbuster Myth: successful entrepreneurship creates huge enterprises à la Google that transform how we live. In reality, "most ventures don't change the world," says Panner. They're unknown companies providing highly specialized goods and services, plus restaurants, auto-repair shops, and many other unromantic businesses. There are more than 500,000 startups annually. The number must be large to make an impact on the 155 million–person labor force.

Second is the Inspiration Myth: most startups spring from some epiphany suggesting a new product or technology. Wrong. Gee-whiz moments are few. Companies constantly change plans. OpenAir ditched its original idea, which didn't draw customers. "You can't do anything until you meet someone's needs," says Panner. Failure rates are high; half of new firms die within five years.

And finally, the Incentive Myth: it's necessary to keep tax rates low, so entrepreneurs can reap huge rewards for their time, sweat, and money. Well, this may be true, but it misses a parallel truth: government disincentives to entrepreneurship. Panner, a registered Democrat, criticizes complex accounting, employment and health-care regulations imposed by federal and state agencies that consume scarce investment funds and time. There's a bureaucratic bias, unintended perhaps, against startups.

It's all about risk taking. The good news is that the entrepreneurial instinct seems powerful. Americans like to create; they're ambitious; many want to be their "own bosses"; many crave fame and fortune. (Panner is already involved with a new startup; it has five employees.) The bad news is that venture capital for startups is scarce and that political leaders seem largely oblivious to burdensome government policies. This needs to be addressed. Entrepreneurship won't instantly cure America's job deficit, but without it, there will be no strong recovery.

Robert Samuelson is also the author of The Great Inflation and Its Aftermath: The Past and Future of American Affluence and Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong.