Innovation and Jobs

Oct 26, 2011 • 853 Views

Just say, “More productivity, R & D and economies of scale,” and you are talking about large firms. New Yorker financial columnist James Surowiecki reminds us that too often we glorify small businesses and forget how A&P, Walmart and their large siblings stimulated economic growth.

On the other hand, economist Michael Mandel characterizes the small business as a job creation machine. Citing a 2009 Kauffman Foundation paper, he tells us that young firms, less than 5 years old, generated between 60% and 70% of all new jobs. Explained as a process constantly in motion, young firms are created, some fail, some grow and those that are the most innovative tend to be acquired by larger firms. For Mandel, though, the key is the innovation that began the process and the economic growth at the end.

Our bottom line? Innovation at older, large firms and young, small firms fuels job creation and economic growth.

The Economic Lesson

Firms with 2-19 employees, close to 90% of all businesses, far exceed the number of large establishments. However, in most other ways–revenue, payrolls, number of employees–the large firm is dominant. Slightly more than 40% of the labor force works for only .3% of all businesses. (From this Kauffman paper, pp. 2-3, based on BLS stats.)

An Economic Question: Do you believe that the legislation that Congress is considering, the Innovate America Act, creates the incentives that will lead to innovation, start-ups, and job creation?

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