The Magic of Startups: Jobs

March 9, 2011

Kent Hoover at portfolio.com helps make a critical distinction about the sources of job growth: it depends less on small businesses than it does on new small businesses.  Hoover reports on the second annual “State of Entrepreneurship” address by Kauffman Foundation CEO Carl Schramm:

The widely repeated claim that small businesses are the vital source of new jobs isn’t supported by the facts,” (Schramm) said. “It may sound good on the campaign stump, but here’s the reality: Companies with fewer than 500 employees—the official definition of a small business—account for roughly four out of 10 jobs. Firms of less than 100 employees—a more commonsense definition of small business—account for less than one-third of American jobs.”

The key to growing the U.S. economy is helping more new businesses become billion-dollar companies over time. Currently about 15 of the 600,000 new businesses launched every year in the U.S. grow to become billion-dollar businesses, according to Kauffman. If we could increase that number to 45 to 70 a year, “we’d permanently increase the economy’s growth rate by one full percentage point.”

Schramm’s recommendations (discussed in his address and in Kauffman’s Rules for Growth) include:  enabling more high-skilled immigration, streamlining university technology licensing practices, tax reform, and patent/IP reform.

As we’ve noted before, new businesses do account for a large percentage of the NEW jobs created each year, so encouraging new business formation remains critical to putting Americans back to work.  Beyond that, it’s a numbers game.  The more new businesses, the more likely that some of them will go on to be billion dollar businesses.  But you don’t get the latter without the former, so it’s critical that our tax and regulatory policy encourages new business formation.

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