Where do jobs come from?
It’s a reasonable question in light of the recent jobs report. The economy created a measly 50 thousand jobs last month, following gains that averaged over 200 thousand over the past three months. Government employment fell, as did manufacturing jobs in light of the supply constraints coming out of Japan, while professional services and health care jobs grew.
But where do the jobs come from? Predominantly, they come from new small, young firms. In a recent study over 60% of new jobs came from companies less than 6 years old, and 53% of new jobs came firms with less than 50 employees. Part of this is structural: since most firms have only an 80% chance of surviving in any one year, after 5 years only 35% of those firms will survive, and 65% of the jobs will be in younger firms. That’s just mathematics.
So some of this is the creative destruction of old firms by new, smaller companies. Jobs are neither created nor destroyed when a company goes out of business and its employees find work elsewhere in the industry. But part of it is policy: when younger firms start fresh with the intellectual capital the founders might have been able to gather at old-line firms, everyone benefits. Consumers get a more closely tailored product, the small firm gets to get closer to customers and control their own destiny, and the larger firm may lose a creative individual who may have been disruptive in the office.
Jobs are created when entrepreneurs see a way to serve their customers more effectively. Government can help, but mainly by leveling the playing field and staying out of the way.
Douglas R. Tengdin, CFA
Chief Investment Officer
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