Dane Stangler and Jason Wiens: Young companies are the job creators

06/01/2014 12:00 AM

06/01/2014 6:43 AM

Eight out of 10 Kansas companies have fewer than 20 employees. Small business must be the engine of the state’s job creation then, right? Not exactly.

Given their pervasiveness, there is no doubt small businesses contribute to the economic strength and cultural vitality of Kansas, but their corresponding share of employment is, well, small. Although small businesses comprise more than 80 percent of Kansas firms, they account for less than 20 percent of employment.

Small businesses, while important, just don’t pack a very big employment punch. Meanwhile, those big corporations that everyone loves to hate comprise less than 1 percent of Kansas companies but account for nearly a quarter of employment.

Neither group, however, is the major contributor of new jobs in Kansas. That distinction falls to another category of companies: young firms less than 10 years old – especially young, fast-growing firms.

Young firms have far higher rates of job creation than older businesses, no matter the size. In Kansas over the past few decades, young firms have had job-creation rates between 40 and 50 percent. Older businesses, by contrast, have created jobs at a much slower clip: between 10 and 20 percent per year.

Big, established companies also destroy many jobs, and that job destruction tends to erase most of their job creation, leaving their net contribution much smaller. In fact, net job creation by the oldest and largest Kansas companies is remarkably sensitive to business cycles, bouncing sharply up and down from year to year.

It turns out that the steadiest contributor of net new jobs in Kansas is young firms. Every year from the early 1980s right up to the brink of the recession, young firms contributed between 10,000 and 20,000 net new Kansas jobs. Much of that job creation came from fast-growing young firms, those expanding from a handful of employees to 50 or 75 in a few years.

These numbers have two major policy implications. First, the governor, Legislature and other state officials need to think about job creation according to firm age, not just firm size.

For example, income taxes are often less of an issue than employment and property taxes. And it’s not necessarily the level of taxes but the complexity of the tax code that vexes young companies.

Additionally, occupational licensing laws can be an undue barrier on the creation and growth of young companies. Many licensing requirements go well beyond public safety and serve to protect the established businesses that are not net job creators.

The second policy implication is that tax incentives, a central tool of economic development, do not appear designed to help young companies. They are almost entirely skewed toward existing firms, particularly large ones. That’s not necessarily a bad thing: Existing companies are important for productivity and innovation. But when state policy – and money – disproportionately favors these firms, versus job-creating young firms, it sends the wrong signal and can hamper the growth of the Kansas economy.

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