Job Creation Research.

Modern job creation research started in the 1970's with the work of David Birch who discovered, contrary to the extant GroupThink, that small businesses create most of the new jobs in the U.S. economy.

Birch's work had two consequences that are of interest: (1) A relative avalanche of research was undertaken to find out more about the relationship between businesses, their size and their growth rates, and levels of job creation, and (2) the U.S. Congress was moved to charge the SEC with developing a policy to make it easier for small businesses to get financing. The SEC acted by establishing an exemption allowing small companies to undertake direct public offerings (DPO's).

Note 1: What is very relevant here from a policy analysis point of view, especially in the context of the present economic crisis, is that a sound congressional mandate resulted in a policy decision that ended up being MORE than COMPLETELY mangled in its implementation. I mean measurably more than 100% bad implementation! How can that be? Simple: the DPO exemption, because of negligent implementation, ended up harming nearly everybody it touched, small business owners and principals, and investors. This happened even though DPO's are truly an excellent idea!


The Key Job Creation Research Findings

In the 30 years since Birch began his research we have pretty well determined how businesses as a group generate jobs. Two key studies are "High-Impact Firms: Gazelles Revisited" (2008), by Corporate Research Board, LLC, and "Small Business Growth: Searching for Stylized Facts" (2007), by Brian Headd, of the U.S. Small Business Administration, Office of Advocacy, and Bruce Kirchhoff at the New Jersey Institute of Technology.

The above research provides a necessary starting point for an effective job creation policy. For example, relevant highlights from the high-impact research are that:

    1. From 2002 to 2006 there were 376,605 highimpact firms in the United States. This number
      increased from 299,973 between 1998–2002 and was greater than the 352,114 firms in the 1994–1998 period of analysis.
    2. During the 1994–2006 period, firms with fewer than 20 employees represented 93.8 percent of the high-impact firms and 33.5 percent of job growth among high-impact firms, while firms with 20 to 499 employees represented 5.9 percent and 24.1 percent, respectively.
    3. For the three firm-size categories analyzed, the average size of high-impact firms in the 1-19 size category was 3 employees at the beginning of the period of analysis, increasing almost out of the size category to 16; for the 20-499 firm-size class it was 65 increasing to 209; and for the over-500 size class, it was 3,648 increasing to 8,041.
    4. High-impact firms exist in all industries. While some industries have a higher percentage of these firms, they are not limited to high-technology industries.
    5. High-impact firms exist in almost all regions, states, metropolitan statistical areas (MSAs) and
      counties.
    6. Nearly all job loss in the economy in each of the three time periods analyzed is attributable to low impact firms with more than 500 employees.

The basic research result is this:

Growth businesses account for practically all of the new net jobs that are created in an economy.

Note 2 : For policy purposes it is extremely important to understand the relationship between business formation, small business start-ups and growth, and older high impact firms. This is where we need good theory as we do not have clear facts, although there is other research that can be brought to bear; specifically, the findings on sustained business growth and success reported in What Really Works. (Click here for additional information about this research.)


The Research Versus Policy Disconnect

Although there have been some minimal policy responses resulting from recognition that small businesses are a major contributor to job creation, there has been no comprehensive, systematic policy established to date that is based on what we know about job creation.

[Now, if you have a cynical frame of mind (see finding #6 above), you might guess where most economic development resources have been allocated in the last 30-40 years, and your guess would likely be right. In the U.S. economic development funds have primarily been spent to pay government bureaucrats to hand over tax breaks to large low-impact firms to create jobs (not because of corruption, mind you.)]

Just because we have most of the knowledge needed to understand the relationship between business growth and job creation, doesn't mean that such knowledge is sufficient to formulate and implement an effective job creation policy. There are other areas of knowledge that must be applied as well to design such a policy. Fortunately, much of the needed knowledge is available in those areas also.

Specifically, an effective job creation policy must apply knowledge relating to the following:

  • Community culture, business startups and business growth (venture development)
  • High impact companies, networks, trade, finance and the velocity of money
  • Entrepreneurship, training, learning, experience and business success
  • Design and implementation of an optimal support infrastructure that fosters the development and success of high impact companies

If and when an informed effort is made to formulate a job creation policy that incorporates the above knowledge areas (this can actually be accomplished relatively quickly), we may achieve the holy grail of sustained economic prosperity; i.e. perhaps break the business cycle.

Note 3 : For an important work that presents excellent insights and background relating to the information presented on this page, see Reuven Brenner's book, Labyrinths of Prosperity

 

Be sure to read the blog page and participate in the discussion.

 

 © COPYRIGHT 2009 ALL RIGHTS RESERVED MICRO BUSINESS GROWTH, INC.

 

Seed Start-Ups
the Right Way

As there is a significant degree of uncertainty in our ability to predict the formation and success of high impact companies, stimulating larger numbers of business start-ups and fostering a general entrepreneural culture is our best job creation policy goal.

The Jobs Problem Simplified

Articles

Winning the Economic Policy Formation and Implementation Game: Defense or Offense, Part 1