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Where Job Growth Comes From

Posted by: John Tozzi on October 25, 2011

Reuters blogger Felix Salmon explains in a post yesterday why small businesses are not the drivers of new jobs or productivity that politicians often say they are. Riffing off two pieces out this week, Salmon reminds us of research suggesting that it’s startups, not small businesses, that create jobs: “A small family business which has been around for decades is unlikely to be an engine of job growth; meanwhile, large young companies (think Groupon) can hire extremely quickly,” he writes.

Of course, having more new companies alone doesn’t automatically mean more high-growth companies. Here’s columnist Scott Shane writing two years ago:

Places with the most high-growth companies tend not to be the places with the most new businesses. Consider the example of Silicon Valley, the part of the U.S. thought of as a locus of many high-growth companies. When measured on the rate of per-capita new business formation, the poles of Silicon Valley—the metropolitan areas of San Jose and San Francisco—do not score high.

Examined more formally, the data indicate that the correlation between the share of high-growth companies and the rate of company formation is actually negative. The places with higher company birth rates have a lower share of high-growth companies.

Shane finds some evidence that those high-growth companies are not predominantly startups:

In addition, [economist Zoltan] Acs and his colleagues found that most high growth companies are not young companies. They explain in their study: “On average, they are 25 years old…[and] less than 3% of high-impact firms were born in the previous four-year period.” If high-growth companies tend to be more mature ventures, then efforts to create more new outfits is unlikely to generate a lot of high-growth companies.

(Here’s an updated version of the study Shane cites.)

The contradictions here show there’s clearly a lot economists still don’t understand about the types of companies that create jobs and what policies will encourage them. All this requires a more nuanced discussion than we’re likely to get from politicians, especially during a presidential campaign. Instead, we’ll continue to hear small business described as the “lifeblood” or “backbone” of the American economy.

Reader Comments

Balboa Capital

November 3, 2011 5:04 PM

Great article. Small businesses are the backbone of the US economy and our company works with many of them on a daily basis for their funding needs. We've noticed that no matter what type of economy we are experiencing, small businesses across all sectors are investing wisely to gain market share and become successful sooner rather than later. It's an old concept, but it's smart business.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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