YOUNG FIRMS DRIVE MASSIVE JOB CREATION ALL OVER THE WORLD

The global startup sector is undergoing a rapid, prolonged expansion, with the low cost and ubiquity of building blocks for tech startups leading to more entrepreneurs tackling billion-dollar markets than at any time in history. In 2014, The Economist called this a ‘Cambrian explosion’ – with entrepreneurs reshaping entire industries and giving rise to a global movement. Contrary to predictions from some quarters of a repeat of the dot-com crash, that expansion has solidified and accelerated in the half-decade since. The economic forces at work here are profound, as startups – and the technology companies they become – now account for a large and growing proportion of the world’s productive output.

One of the clearest outputs of the startup boom has been rapid job creation in areas where tech firms have clustered. Research conducted by Enrico Moretti, Professor of Economics at the University of California, Berkeley and an expert on the future of economic growth, suggests technology-based jobs have a larger multiplier effect than jobs in any other sector. Moretti found that for each new technology-based job, five additional jobs are created in other sectors. He notes that this multiplier effect is three times larger in the technology sector than in extractive industries (such as mining) or traditional manufacturing. This multiplier is one of the reasons that employment in the US technology sector has grown at 25 times that of other parts of the economy.

Moretti highlights a snowball effect whereby regions that spawn a number of large technology companies generate their own attractive pull, making that region more conducive to attracting further knowledge-intensive companies and workers.

By way of example, Moretti points out that in 2012 (when his work was first published) Facebook employed only a few thousand people in its Menlo Park headquarters, but in doing so had indirectly created an estimated 53,000 jobs for Facebook app creators and 130,000 jobs in related business services. Similarly, Apple estimates its 80,000 direct employees in the US make up just 4% of the total number of US-based jobs the firm has created, with 450,000 jobs having been generated with US-based suppliers and more than 1.5m jobs attributable to the app store ecosystem.

A study by the Kauffman Foundation in 2015 found that 1.5m new jobs are added to the US economy each year by new firms, while over an extended period existing firms have been net job destroyers, losing a total of 1m jobs per year (Figure 12). The report emphasises that it is not small businesses that are the primary engine of job creation, but rather young businesses.

These findings are not unique to the United States - data collected from the OECD mirrors the same pattern of young firms acting as net job creators.

OECD DynEmp data indicates that the contribution of young firms to job creation is much higher than their share in total employment (Figures 12 and 13). On average, firms five years old or younger account for only 17% of total employment, but are responsible for 47% of job creation (Figure 14).

On a country-by-country basis, the similarities are striking. There is a pronounced and universal pattern in net job creation from young firms.

The UK’s Centre for Economics and Business Research found one in every five new jobs in the UK and more than 20% of economic growth was created by high growth small businesses between 2015 and 2016. Representing less than 1% of UK business, these 22,074 companies created on average more than 3,000 new jobs each week.

Based on this and similar research in other countries, the UK government has increasingly taken an economic policy approach of focusing support on the relatively small number of companies with the highest growth potential, rather than broad support programs for new businesses and SMEs.

According to NESTA’s Chief Executive Jonathan Kestenbaum, ‘Backing excellence and innovation is not an elitist policy: rather, it is the best way of generating employment and opportunity.’

FIGURE 12: NET JOB CREATION IN THE USA
crossroads 2019 WEB Charts Figure 12
FIGURE 13: NET JOB GROWTH: NEW VERSUS ESTABLISHED FIRMS, 2001-11 (AVERAGE OVER 15 COUNTRIES)
crossroads 2019 WEB Charts Figure 13
FIGURE 14: YOUNG FIRMS CONTRIBUTE DISPROPORTIONATELY TO JOB CREATION (OEDC)
crossroads 2019 WEB Charts Figure 14