New Economy Blues

Do Startups Create Jobs or Destroy Them?

need a job shirt Do Startups Create Jobs or Destroy Them?

Not so funny t-shirts

Google, conceived in 1998, employs just north of 30,000 people and generates $35 billion in annual revenue. Facebook, founded in 2004, has around 3,000 staffers and $4 billion in revenue. Twitter, founded in 2006, has between 200-300 people working for it.

Each of these companies has achieved a global scale and it might be argued that Twitter, during the recent Arab Spring, was the most important new service catalyzing major political change.

Anyone who caught Mayor Bloomberg during one of his recent speeches at tech events and ribbon-cuttings knows that he believes the tech sector is the key New York’s future success. But the very nature of startups–to seek out disruptive new efficiencies around which to build a business– presents a paradox in terms of job creation.

With persistent high unemployment weighing on their minds, Congress held a hearing yesterday focused on this issue. As GigaOm reports, “Brink Lindsey, a senior scholar in research and policy at the Ewing Marion Kauffman Foundation, told the House Subcommittee on Technology and Innovation that the number of startups, long a source of new jobs, have been declining since 2006, and when they are created they tend to generate fewer jobs.”

jobs per startup Do Startups Create Jobs or Destroy Them?

Jobs created per startup

Betabeat has heard time and again from veterans of the dot-com boom and bust that today’s breed of startups can build a viable business with a fraction of the employees required in the 1990s. Data from the Bureau of Labor Statistics bears this out. Startups tend to open with 4.9 employees these days, compared to 7.5 in the 90s.

The Kauffman foundation chronicled some of these trends in their recent report: Starting Smaller, Staying Smaller – America’s Slow Leak in Job Creation. So while startups continue to be the engine that drives new job growth, that growth has become smaller, more efficient and slower to expand. And for every job that a Google or Facebook or Twitter creates, many others may be lost in older industries that are being disrupted by these young upstarts.

Or as Matt Langer so eloquently put it on Twitter: “Q3 productivity up in equal measure to labor costs down? This recovery is going just swimmingly for the machines.”

James Surowiecki, writing in The New Yorker, highlights America’s long standing love affair with small business. But he also argues that, “Given that the overwhelming number of American businesses are small, and that, as we’ve all heard, small businesses create most new jobs, this seems reasonable enough. But the truth is that, from the perspective of the economy as a whole, small companies are not the real drivers of growth. One can see this by looking at the track record of the world’s economies. The developed countries with the highest percentage of workers employed by small businesses include Greece, Portugal, Spain, and Italy—that is, the four countries whose economic woes are wreaking such havoc on financial markets. Meanwhile, the countries with the lowest percentage of workers employed by small businesses are Germany, Sweden, Denmark, and the U.S.—some of the strongest economies in the world. This correlation is not a coincidence. It reflects a simple reality: small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard.

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Comments

  1. As now all people depend on the online sources for each of the thing and people trust on them also. And now as announced of using google , FB , twitter for finding the jobs. So now people will find the provided job online effective and they move towards it. But is there any assurance for the own field job and to move with that longer. So advice is not to be the machine dependent for all the things , because people who find new ideas and technology to run their business will be stick at their job by impressing with their work , but others have to loss the job. So think just once before using it.

  2. Mark Birch says:

    The analysis is wrong.  Do not look to the companies to hire, look for ecosystems to develop around those companies to create jobs and opportunities.

    1. True there are ecosystems built around each one of these companies that employ many people – like the social gaming industry based on Facebook’s platform. 

      But I think there is a more tectonic shift underway to a leaner, more efficient economy, as we move further away from analog industries and rely increasingly on digital. 

      It’s exciting to see companies like SkillShare and Code Academy and GA helping folks with new education for the new economy. 

      But I’m not sure that will be the answer to sustained unemployment of large portions of the population. 

  3. The number of employees per company may be going down, but the opportunity for people to start businesses of their own is rising accordingly.

    It’s never been easier for someone to hire themselves and develop a sustainable business, but we’re not used to thinking that way. 

    We still think the path to salvation is through finding more Facebooks to hire thousands of employees, when that’s really only one part of the bigger picture.

    1. Mark Birch says:

      Exactly.  Change is painful, but the day of the “corporate” job that existed in the 50′s is getting disrupted.  If people want to get back in control of their lives and careers, they need to get entrepreneurial.  No one is just handing out jobs anymore.

    2. Scott Wells says:

      Great point, Tony. The report states that the number of “new employer businesses–those that provide work for individuals other than the founder” has been dropping, not necessarily the number of independent entrepreneurs or the self-employed. 

      The advent of new technologies and the web has increasingly allowed for people to make a living other than via the corporate farm. These people aren’t necessarily all web developers or digital media consultants, they’re also people that use Square to sell things in real life, or picked up gigs on the side using Craigslist, or started a business in a third-world country because of Kiva loan.

      The bottom line is that it shouldn’t matter if startups create jobs or not. Startups, and the innovation and competition that accompanies them, change industries for the better by making them more efficient and productive. The world can’t “slow down” technology so that more unskilled laborers have jobs. That’s why its now more important than ever that people are exposed to being self-taught and can learn the skills required to survive in today’s competitive job market.

    3. Scott Wells says:

      Great point, Tony. The report states that the number of “new employer businesses–those that provide work for individuals other than the founder” has been dropping, not necessarily the number of independent entrepreneurs or the self-employed. 

      The advent of new technologies and the web has increasingly allowed for people to make a living other than via the corporate farm. These people aren’t necessarily all web developers or digital media consultants, they’re also people that use Square to sell things in real life, or picked up gigs on the side using Craigslist, or started a business in a third-world country because of Kiva loan.

      The bottom line is that it shouldn’t matter if startups create jobs or not. Startups, and the innovation and competition that accompanies them, change industries for the better by making them more efficient and productive. The world can’t “slow down” technology so that more unskilled laborers have jobs. That’s why its now more important than ever that people are exposed to being self-taught and can learn the skills required to survive in today’s competitive job market.

  4. I think the more important question is: will startups ever create the right kind of jobs? Startups tend to hire young grads from Tier-1 colleges or senior members of another startup’s team. While I’m sure there are lots of new NYU and UPenn grads looking for work, statistically speaking these are not the groups with the most need.

    I kind of get annoyed when startup people pat themselves on the back for the whole ‘helping the economy through job creation’ thing. The type of job creation that helps pull an economy out of a recession is the type that hires from community colleges and decidedly unglamorous demographics like the lower-middle class and people over the age of 40 who have never worked at Google, Paypal or Facebook. Startups do not create these kind of jobs. They create jobs for people who already have jobs. One only need to watch developers jump from Boxee to Group.me to Twilio to Shelby.tv to… whatever. It’s a game of musical chairs, one that’s unlikely to ever trickle down to the places where the economy needs help.

  5. Anonymous says:

    Wait, doesn’t this chart just mean that fewer startups are created in a recession (which is pretty much to be expected)?