By: Blakely Blackford.

At 3.1 million jobs, U.S. net employment growth in 2014 was the best since 1999. More notably, it brought the total job count to pre-crisis levels—welcome news after the 2008-2009 economic bloodbath that slashed 8.7 million jobs. The U.S. at the close of 2014 boasted 2.2 million more jobs than before the financial crisis, and by the end of 2015, that tally had grown by 2.7 million.

Who created these jobs? What factors contributed to faster job growth in some regions than others? Understanding which types of firms are responsible for this job creation is a huge question for policy makers, an ongoing challenge even as the economy continues to grow.

Previous research has shown that most new job creation occurs in startups. The question is why. In order to launch a new idea, do you need to launch a new business? If that’s the case, then new businesses don’t create jobs; new ideas do. Alternatively, do startups seize ideas that are out there in the open, up for grabs? If so, then startups are more than just vehicles through which new innovations are born, they are the vehicles through which opportunities are seized. Manuel Adelino and David Robinson at the Fuqua School of Business, along with PhD student Song Ma, look at this question. Their work explores which types of firms—startups or older, big or small—create new jobs when a region is hit by an economic shock.

To zero in on this question, the authors focus on the non-tradable sector. Non-tradable jobs depend on local demand, since consumers rely on locally-rendered services for everything from a car wash to a new car, or a haircut and a night out. “The main reason we focused on non-tradables,” says Robinson, “is that we wanted to make sure that when we were comparing job creation across different regions, we were accurately measuring jobs that were being created in response to a local shock. If Apple makes a new iPhone and then hires more people, their innovation caused the employment growth. It’s not that Apple jumped at an opportunity that other firms could have seized. We wanted to make sure that the local economic shocks we were measuring were really local, and therefore up for grabs by any of the firms in the region.”

Startups account for just 6% of overall employment in the U.S. in this sector, but because they are agiler than older firms, they generate 90% of net new employment. Firms aged 6 and up are responsible for the remaining fraction of net employment growth. Most firms in between startups and growth-focused mature firms actually shed jobs—suggesting that a lot of churn in the labor market comes from young firms reorganizing as conditions improve.

Even so, the authors find that startup jobs are not short-lived, which suggests that this responsiveness—the creation of firms and jobs—is “not the result of an overreaction by entrants.” For startups located in areas most directly boosted by manufacturing shocks, about 85% of the jobs that new firms create in response exist two years out, with three out of four jobs created surviving for at least four years. In areas less affected by local manufacturing shocks, startups create fewer jobs per capita; even so, on average, two-thirds of those jobs remain after four years.

Successful startups grow into firms that are competitive and innovative enough to respond to income shocks. Unlike new firms, mature and young firms rely on a combination of job creation and destruction, or churn, to grow and develop. The authors find that the two forces “effectively cancel each other out” in net employment growth for any age firm except startups, which must hire in order to grow. Other firms, once past the startup stage, have little desire to expand. By definition, startups respond to economic opportunities—otherwise, they don’t survive.

Since startups drive employment growth in a region, a hot topic for policymakers and regional planners is how to attract entrepreneurs and support startup communities. The authors look past the glitter of accelerators, incubators, angel networks and VC firms and find that startup responsiveness is one and a half times as strong in areas with a robust presence of local banks. Recent work emerging from the Kauffman Foundation’s Kauffman Firm Survey has demonstrated that banks play a critical role in the startup process, even among high-tech firms. Greater local bank concentrations can increase job creation among startups by 50%.

Robinson thinks the research has important implications for how we think about economic growth. “There are conflicting accounts of the state of American entrepreneurship out there right now. One holds that it’s on the decline. People who hold this view are mostly focused on statistics that track new business creation. The other is that it’s flourishing. People who hold this view are looking at the data on elite technology startups. Everyone understands that this latter group of startups is creating the technological innovations that will change how we live our lives. But what our work shows is that these other startups are really important in terms of how flexible and dynamic local economies are.”

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