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Start-Ups: The True Engines of Job Growth

We’ve heard time and time again that small businesses are “the engines of job growth” in America. This isn’t completely wrong, but the Wall Street Journal has looked more closely and found that neither small businesses nor large businesses are responsible for most job growth. Start-ups are:

 The comparative stability of larger companies helps refute the notion — a favorite of politicians of all stripes — that small businesses are the “engine of job growth.” Over the past 20 years, small companies have added about 85,000 jobs per quarter, on a net basis. Big companies have added three times as many.

The real engine of job growth is an altogether different set of companies: Neither small nor large, but young. As economists John Haltiwanger, Ron Jarmin and Javier Miranda showed in a 2010 paper, what really drives job growth is fast-growing start ups.

The trouble for the economy is that start-up activity has been weak since the recession ended. New companies (a category that includes seasonal businesses reopening their doors) accounted for 15% of all new jobs in the second quarter, the smallest share since 2001. Newly opened firms created an average of 5.5 million jobs per month from 1992 through the end of 2006. Since then, they’ve created just 4.7 million per month. There’s evidence that this is a longer-term trend, pre-dating the recession.

Given this reality, policymakers should be thinking less about favoring small or large businesses and more about how to create the best possible conditions for new business. Unfortunately, politicians would rather do favors for existing business, giving tax cuts and other incentives to firms that will reward them rather than creating a welcoming environment for start-ups.

One thing America really needs now is a good start-up lobby that identifies and promotes policies that help new entrepreneurs and calls out the hacks who would rather sprinkle subsidies on established firms than help the new ones get going.

Policy needs to be about the future, but politics often reflects the patterns of the past.

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