Startups: Job Creation Engines (Are You Listening Obama?)

In this week's issue of BusinessWeek, we published the inaugural list of

In this week’s issue of BusinessWeek, we published the inaugural list of “The World’s Most Intriguing New Companies.” I am thrilled that we launched the package right as Global Entrepreneurship Week kicks off, taking place Nov. 16-22, in 85 nations.

In my lead story for the package, “Fertile Ground for Startups,” I made two big points: 1. Startups are playing an increasingly important role in American business 2. Startups may play a central role in any recovery.

There was one startling new study, based on 2007 Census data, I was unable to work into the story that I want to highlight now, which provides some empirical evidence supporting the second point.

According to a new study by the Ewing Marion Kauffman Foundation, which was co-written by the respected economist Robert Litan, companies less than five years old generated nearly two-third of the net new jobs created in the U.S. in 2007. Without these startups, “net job creation for the American economy would be negative in all but a handful of years.”

The upshot: It is clear more than ever that new companies and the entrepreneurs that lead them are the engines of job creation and economic recovery.

It is well known within economic circles that new companies produce the majority of new jobs in the U.S. economy. What this reports reveals for the first time is extent of that trend, and the fact that startups play a particularly important role in growing jobs out of a recession. New companies have produced all of the net new jobs in the U.S. from 2001-2007, and also from 1980-1983, the last big American downturn, according to the study.

This has huge implications for the Obama Administration as it tries to get the economy growing again. It also suggests a shift in focus and policy. Instead of focusing on saving large and dying industries (i.e. automakers and banks), the Obama Admin. should “begin paying more attention to removing roadblocks to entrepreneurs who will lead us out our current (well-founded) pessimism about jobs and sustain economic expansion over the long run,” wrote the authors of the report.

One idea the authors float: granting a payroll tax holiday for new companies. This is a great and timely idea, especially since the expected health care reform law is supposed to increase the cost of doing business for new companies. Such a targeted tax cut could help offset the pain of health care reform and give new employers more of a reason to ramp up hiring.

This isn’t to discount the role that big companies play in job creation. Large companies with 10,000 or more employees account for more than 10% of net job creation. But even then the authors note that those new net jobs may stem from the process of big companies acquiring young ones. “One of the only ways for big companies to add net jobs is to acquire younger companies that are not only generating jobs, but also are responsible for a good number of innovations that will keep the bigger company’s revenue from diminishing,” write the authors.

- Spencer Ante also publishes the Creative Capital blog. Click here to read more.

Where Will the Jobs Come From? Startups!

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