The recent announcement that the United States unemployment rate is down to 3.9%, the lowest since 1969 and that only seven states have unemployment rates above 4.6% – the number used by economists to measure “full employment”, is great news for the American economy
On the other hand, according to the Center for Economic and Policy Research, wage growth has been weak – only 2.6% year-over-year, and this month’s drop in unemployment was due to 236,000 Americans leaving the workforce, not from employers creating jobs. For many economists, low unemployment, combined with low wage growth and reduced job mobility, implies that people are not switching jobs, but not getting ahead where they are.
So who is creating jobs in America? According to a Congressional Research Service (CRS) analysis on private-sector job creation in the United States for the Small Business Administration (SBA), startups play an important role in American job creation, but only over time, because fewer than half of all startups in America survive after five years.
Startups with fewer than 20 employees tend to have a negligible effect on net job creation until they pass the 5-year post.
The SBA study of data from 1994-2006 concludes that larger startups, with 20-500 employees, have the greatest effect on job creation. They are “able to increase their level of productivity sooner after entry” than startups with fewer than 20 employees, because they had products in the market and better access to capital, and, as a result, were in a better position to “challenge existing firms and increase the competitiveness of surviving existing firms”.
The CRS study calls these growing startups “high impact”. High-impact businesses are defined as “having sales that have doubled over the most recent four-year period and have an employment growth quantifier of two or more over the same time period”. They account for only 5-6% of all businesses with employees but they seem to account for “almost all [net] job creation in the economy”. In addition, these high impact startups exist in all regions and states and are relatively evenly distributed across all industries. Large companies with over 500 employees have only accounted for about 30% of American job gains since 2011.
The report has some important implications on US policy which since 2009, focused primarily to promote entrepreneurship on early-stage innovation.
But maybe federal resources – such as technology transfer, SBA loan programs, research grants or other programs, should focus on the high-impact startups that have survived their first years and are actually creating permanent jobs.
The US government provides about $50 billion annually to federal research labs directly. The NIST and other federal agencies can focus some of their programs beyond early-stage commercialization and find stable startups that are more likely to succeed in licensing technology and transforming it into a commercial product or service than an early-stage startup. Cities, states and regions across America should revise their economic development strategies to have less focus on startup accelerators and give more emphasis on helping locally-based, high- impact firms to get to the next level of their growth.