Thursday, September 16, 2010

Jobs, Jobs, Jobs: From Where Will They Come?

Contrary to common perceptions, it is not the big companies, such as IBM, or Microsoft, or even Apple or Google that create jobs or even revolutionary technology revolutions. While this may sound suspect, it was proven by the Kauffman Foundation of Entrepreneurship Research Series: Firm Formation and Economic Growth. The Kauffman report cited a relatively new dataset from the U.S. government called Business Dynamics Statistics (BDS), which revealed that firms in their first year of existence add an average of three million jobs per year. Because so many firms go out of business within the first five years of their existence, firms that already exist actually lose more jobs per year than they create. In fact, the report indicated that from 1977 to 2005, existing companies were net job destroyers, losing one million net jobs per year. While the startup company may not survive after the first year or beyond year five, during its startup year, this sector of the economy is responsible for creating one million new jobs. Startups lead the way in terms of job creation. So while the behemoths like Google and IBM acquire small companies who were recent startups, it is important to appreciate that it is the startups which assume the initial risks and prove the viability of their business, and are responsible for the surge in job growth.

Vivek Wadhwa is an entrepreneur turned scholar. He is Visiting Scholar at the School of Information at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. In reporting about the Kauffman findings, he concludes that since we cannot count on the Intels or the Microsofts to create employment, business incentives such as tax benefits to remain operational in a state should favor startups over large multi-nationals. His recipe for creating new jobs is to focus attention on helping the small entrepreneur.

There is great debate raging as to whether the U.S. should have bailed out the big banks and automobile manufacturers. Wadhwa provides a thought provoking argument to gear public policy towards startups. Examples of such public policy include patent protection laws, seed financing, tax breaks, education and infrastructure all aimed to help the little guy.

To piggy back arguments to encourage public policies to support the little guy, William Dunkelberg, Chief Economist for the National Federation of Independent Business, takes exception to economic arguments being made to legislate greater policies to encourage more spending. An argument being made by some today is that the “rich” deserve to have their taxes increase, and furthermore, if they pay less in taxes, they will save it, which will not jump-start the economy. The argument is that “poorer” people spend more, and spending greases the wheels of the economy better than savings do. What Dunkelberg points out is that for banks to lend, someone on the other side must be saving and deploying funds into the financial system. Also, most startup businesses are financed through hard-earned savings of the entrepreneur. So, the seeds for job creation which will come from startups and small entrepreneurs, stem from savings.

Let’s hope and vote for public policies that promote savings and fiscal responsibility, especially for the little guy who is the driver of the economy, yet ironically so often and easily overlooked.

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