Where the jobs come from

Last week I promised a more detailed look at some of the new small business opportunities that are shaping up in the new economy. Before getting into that, however I realized that it might be profitable to spend a minute looking at the job creation story. From a jobs standpoint, the potential for job growth is going to depend heavily on new business ventures.

It is important for policy makers and the general public alike to appreciate that the small business verses big business job creation debate doesn’t matter as much as the new verses old business difference.

When you look at the data on net job creation at first it appears that small firms are creating most of the jobs. What is actually happening is that a tiny subset of small businesses are creating most of the jobs. These are young companies. Newly formed companies and youngl, growing firms are the ones that add the most jobs. By definition, most young companies are small, but small isn’t factor that matters. Most small businesses are relatively stable – they don’t add many new jobs after their first few years and they don’t tend to eliminate jobs until they completely shut down.

Analysis by several scholars (Haltiwanger; Kauffman) that study small business job growth reveal two facts. First, the businesses that succeed get successful very quickly. The business owners that get through the startup stage quickly and check off all the necessary boxes as fast as possible seem to stay in business for several years. Or at least, the chances of their business failing is pretty small.

On the other hand, owners that, by their own actions or by necessity, drag out the start up process are very likely to never get their business off the ground. So, not all new businesses create long term jobs either. It is just the new businesses that get up and running quickly.

The second fact is that most small businesses stop growing pretty quickly once they are up and running. That makes sense too, since most small businesses are lifestyle ventures that serve a local market. Restaurants, main street-type retailers and the sole proprietor professional services like accountants get their business up and running and then tend to stay the same size as long as they are in business. The new Italian place on the corner seldom keeps taking out the next wall and moving into a larger and larger space. We don’t often see restaurants the size of Walmarts because they have a natural, efficient size. Most small businesses are like this.

Policymakers should be mindful of these job creation dynamics. It seems worthwhile to focus on tools that can help business founders get up and running quickly to get past the startup stage and begin generating revenue. Things like jump-start type business training and streamlined regulatory processes would be a good place to start. Policy makers also shouldn’t expect to be able to stimulate a lot of job growth in most long-standing businesses. For existing firms, it may be more important to maintain a healthy local business environment; things like consistent regulations and taxes that are low enough but still able to maintain the public services businesses need. For instance, without sufficient revenue, infrastructure and public safety can deteriorate to the point that the entire community becomes a more difficult place for all businesses to function.

We at SourceLinkDallas believe that by facilitating quick access to business resources can help new businesses get up and running quickly. For the more established businesses, SourceLinkDallas offers a way to identify help when a problem pops up or when it is time for that rare, but important expansion opportunity.

Next, week, I promise we will start taking a look at some of the opportunities venture minded people can take advantage of starting with using technology to improve the way traditional service businesses operate.