How Entrepreneurs Create Jobs


According to data released on May 6th, the U.S. economy added 244,000 jobs in the month of April 2011, which is one of the best monthly job gains in almost a year’s time. However, the U.S. economy has produced surprisingly little job growth overall, since the recession ended almost 2 years ago. This has clearly frustrated policy makers, who continue to maintain low interest rates and questionable government initiatives that seek to foster job creation.

The Employment-Population Ratio, representing the percentage of the working-age population in the United States that currently holds a job. The ratio now sits at the same level that it averaged during the 1970’s, a time during which the unemployment rate was substantially lower that it is today.

Government efforts to promote job creation have had little impact for one simple reason: the government cannot create private sector jobs, only private enterprise can create such jobs. Recent research by the Kauffman Foundation provides some additional insights into this subject. Specifically, utilizing data from the U.S. Bureau of Labor Statistics, the Kauffman Foundation recently demonstrated that all new jobs created (net of losses) within the U.S. economy for the past 35 years have been the result of new business formation. In other words, entrepreneurs create jobs. Interestingly, the data suggests that existing businesses are actually net destroyers of jobs, eliminating or losing an average of 1 million jobs per year since the 1970’s. By contrast, new businesses have created 3 million jobs per year, on average, over the same period of time.

Intuitively, this makes sense. Many existing businesses downsize, fail, or are sold to other businesses. A business that downsizes or fails obviously destroys jobs, while one that is acquired is often consolidated, resulting in permanent lay-offs. Furthermore, existing businesses that are large and successful tend to have fewer growth opportunities to pursue and will often focus on productivity improvement strategies (such as outsourcing and offshore hiring) rather than to pursue domestic labor-intensive growth initiatives. However, by definition, new businesses start with no jobs whatsoever, so they can only be creators of jobs.

In order to understand why the current job market is so poor, we need to examine the recent history of new business formation. So, are new businesses being created in the current economic environment? Well, yes and no. According to data from the Bureau of Labor Statistics, the U.S. has had zero cumulative new businesses added during the past 6 years. Since 2005, for every business that was born another business has died.