New Business, Not Small Business, Is What Creates Jobs (Most jobs created by Young Firms)

Wall Street Journal ^ | 11/6/2009 | CARL SCHRAMM, ROBERT LITAN AND DANE STANGLER

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While a slight improvement over last month's numbers, today's employment update from the Bureau of Labor Statistics presents a dismal picture for American workers. As policy makers search for the best remedies to strengthen our economic performance, they can't afford to overlook new firms and young firms.

Unfortunately, in troubled economic times the language of recovery is too often tilted toward large, established companies or to "small businesses," a broad term that traditionally applies to businesses with fewer than 500 employees. The conventional wisdom is that such businesses account for half of the labor force and are therefore the engine of future job creation.

That's not quite the case. The more precise factor is not the size of businesses, but rather their age. According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.

Kiva Systems illustrates the role young firms play in boosting employment. Founded in 2003, the Woburn, Mass.-based company seeks to solve supply-chain problems by using robots to organize, manage and move inventory. The company's not-so modest goal is to "[set] inventory free." Its revenue growth from 2005 through 2008 was an eye-popping 10,399%, and it currently employs 120 people.

Diapers.com, founded in 2004, offers free next-day shipping of diapers. Today the company has 89 employees, and last year it notched $89.4 million in revenue. And let's not forget online giant eBay, which during its first five years of existence, 1995-1999, hired an average of 128 new people per year.

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