The Real Jobs Machine

By Samuelson, Robert J. | Newsweek, October 11, 2010 | Go to article overview

The Real Jobs Machine


Samuelson, Robert J., Newsweek


Byline: Robert J. Samuelson

Without startups, we're sunk.

If you're interested in job creation--and who isn't these days?--you should talk to someone like Morris Panner. In 1999, Panner and some others started a Boston software company called OpenAir. By 2008 they sold it for $31 million. The firm had then grown to about 50 workers. It turns out that entrepreneurship (essentially, the founding of new companies) is crucial to job creation. But as Panner's experience suggests, success is often a slog.

What's frustrating and perplexing about the present job dearth is that the U.S. economy has long been a phenomenal employment machine. Here's the record: 83 million jobs added from 1960 to 2007, with only six years of declines (1961, 1975, 1982, 1991, 2002, 2003). Conventional analysis blames today's poor performance (jobs are 7.6 million below their pre-recession peak) on weak demand. Because people aren't buying, businesses aren't hiring. Though true, this omits the vital role of entrepreneurship.

In any given year, employment may reflect the ups and downs of the business cycle. But over longer periods, almost all job growth comes from new businesses. The reason: high death rates among existing firms. Even successful firms succumb to threats: new competition or technologies; mature markets; the death of founders; shifting consumer tastes; poor management and unprofitability. A company founded today has an 80 percent chance of disappearing over the next quarter century, reports a study by Dane Stangler and Paul Kedrosky of the Kauffman Foundation.

True, some blue-chip firms--the Exxons and Procter & Gambles--endure. Four fifths of the Fortune 500 were founded before 1970. But they are exceptions, and many blue chips have died: Pan Am (once the premier international airline), Digital Equipment (once the second-largest computer maker), and Circuit City (once a leading consumer-electronics chain).

The debate over whether small or big firms create more jobs is misleading. The real distinction is between new and old. American workers are roughly split between firms with fewer or more than 500 employees. In healthy times, older companies of all sizes do create lots of jobs. But they also lose jobs, as some businesses shrink or vanish. On balance, job creation and destruction cancel. …

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