The U.S. economy is stagnant, but not everywhere. Some sectors, in fact, are doing so well they’re making up for lousy performance elsewhere.A new report by the nonprofit Kauffman Foundation and Engine, a technology research group, finds that technology startups create a disproportionately large number of jobs, even though a lot of tech firms overreach and crash and burn. Other types of private-sector firms do create jobs, but they also destroy jobs when they shrink, shut down or merge with other firms.
Big firms employ the majority of Americans, but young firms create the vast majority of new jobs in the U.S. economy, since they tend to grow rapidly compared with larger firms that have already hit critical mass and have a hard time finding new sources of growth. What’s new in the Kauffman report is the distinction between technology startups and other types of new firms, such as Mom and Pop storefronts, eBay businesses, contractor outfits and one-person consultancies.
There are a lot of entrepreneurs in America (thank goodness) but not all of them set out to build the next Google (GOOG) or Facebook (FB). Many people who start a business are content to keep it small and limit their aspirations to serving an existing client base. Such firms may generate a livelihood for the proprietor, but they don’t employ many others. And since half of all startups fail within five years, many new firms end up contributing very little to the broader economy.
Young and fast-growing
The firms that really power the U.S. economy are the fast-growing young businesses. And the Kauffman study finds that tech startups, defined as new businesses with a high percentage of workers who are scientists, engineers or technicians, have been much more successful than private-sector startups as a whole. Since 1990, for instance, technology startups between 1 and 5 years old have created about 2% more jobs than they have destroyed. Private-sector firms as a whole in the same age range have destroyed about 4.5% more jobs than they created. If you factor out the startups that fail, the job creation rate among young tech firms rises to nearly 10%.
There’s a lot of anecdotal evidence to support those figures. Big firms have cut millions of jobs during the past five years. They’re sitting on record levels of cash, but instead of investing it, they’re mostly staying profitable by cutting costs and trying to wring more revenue out of existing lines of business. Occasionally, big firms will “expand” by buying smaller firms — created by somebody else — that fill an important niche for them.
Tech startups don’t necessarily employ a lot of people; as revolutionary as Facebook is, for example, it only has about 5,300 workers. But growth in technology has been so robust that the sector attracts the world’s most ambitious entrepreneurs, with whole new fields — such as social media, mobile operating systems and app development — offering some of the most highly rewarding jobs in any industry. Plus, so-called “STEM” workers— those with expertise in science, technology, engineering or math — enjoy better pay and lower unemployment than other college grads. For students wondering which majors lead to good jobs, the answer might be unsatisfying, but it’s obvious.
'Unknown' tech hubs
Silicon Valley is obviously the epicenter of the digital revolution, but the Kauffman report points out that dozens of cities, including several not usually associated with tech, can be considered digital hubs with good prospects for STEM workers. Among them: Five cities in Colorado, Huntsville, Ala., Missoula, Mont., and Ames, Iowa. Commonalities among tech hubs tend to include a nearby university that emphasizes technology, a youthful culture and an economic environment friendly to startups.
The tech sector is not indomitable, however. The industry that launched Apple (APPL), Google, Tesla (TSLA) and Twitter is maturing, with a higher portion of older firms that aren’t creating any new jobs, on net. That coincides with an overall decline in entrepreneurship during the past couple of decades and the slower-growing economy of the past five years. A job in tech is nice work if you can get it, but it will take more than one resilient industry to revive America’s fortunes.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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- Kauffman Foundation