In Washington shorthand, many politicians have begun interchangeably substituting the phrase “people who have a lot of money” with the more hopeful term “job creators.” With every new debate over raising taxes or lowering the deficit, the two meanings seem to move closer. All job creators, this rhetoric implies, are rich. And all rich are job creators.
But are these two groups really one and the same?
“Everything I’ve studied says the answer is yes,” said Tim Kane, a senior scholar with the entrepreneur-oriented Kauffman Foundation. He adds, though, that there isn’t a single data set that tells us this conclusively. “The reason we’re most likely to believe that is it takes capital to start businesses generally, and usually the people that have capital are going to be wealthy.”
Wealthy in this case means people making more than $200,000 a year, not just millionaires.
First, though, it’s important to explain why starting businesses is important. Economists for years studied the size of firms for clues as to whether small or large businesses were best at creating jobs. The better metric, it turns out, isn’t the size of a company, but its age.
Kane’s research suggests a pretty shocking reality: brand-new start-ups drive just about all job growth in the U.S. They’re responsible for about 3 million new jobs a year, while older companies (including even companies that are just two or three years old) are basically net job destroyers.
“The thing that blew me away was the job creation curve,” Kane said.
We might expect that firms would grow and hit some kind of middle-aged job-creating stride. Firms that appear to grow rapidly like this are often called “gazelles.” “It turns out the curves don’t look like that,” Kane found. “Firms do the bulk of hiring when they’re young, and over time, that whole cohort just doesn’t create that many jobs. This means that the gazelles get slower as they get older.”
This suggests that we should be trying to get a million companies to start up tomorrow, rather than trying to coax existing companies to hire a million more people. Most of those start-up businesses will by necessity be small, but that’s not to say that “small businesses” and “new businesses” are entirely the same thing, either. Politicians often conflate these two groups as well, in championing the economic “backbone” of America’s mom-and-pop operations.
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“There are a number of nail salons or local stores in small towns,” Kane said. “Those are small businesses, they may have four employees. But they’re not necessarily going to go to five employees, or be more likely to than they would go to three.”
This assessment is supported by a new study from University of Chicago professors Erik Hurst and Benjamin Wild Pugsley, who find that few small businesses are actually out to innovate new ideas or even expand their companies.
So helping small businesses operate may be good policy, but it won’t necessarily dent unemployment. And this brings us back to the rich people.
“I’m just speculating, but I would say 10 percent of wealthy people are job creators,” Kane said. “But 90 percent of job creators are wealthy people.”
One, in other words, is primarily a small subset of the other. Creating jobs, though, by lowering taxes on this entire group is somewhat beside the point. The data on start-ups suggests that, rather than looking at the job-creation power of a particular income bracket, we should be looking at the job-creation power of policies that make it easier for companies to launch.
“The question is how hard should it be to start a business?” Kane said. “And I think most Americans and most policymakers would say, ‘Gee it shouldn’t be hard to start a business. We want to encourage business start-ups.’ And that really just puts the conversation in a different light. OK, well what does that environment look like?”
Right now, it doesn’t look that great. In fact, most metrics suggest U.S. entrepreneurship is on the decline.
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