How startups drive job growth and productivity

Interesting new story on the importance of entrepreneurs and startups in the Harvard Business Review. 

Authors Kenan Fikri and Daniel Newman, researchers at the Economic Innovation Group, start by noting the strength and resilience of entrepreneurs: “While some data sources on entrepreneurship operate on a lag, so far it appears that the entrepreneurship surge is real and likely to lead to greater job creation and productivity in the U.S. over the long run.” 

Startup entrepreneurs don't get much love nowadays, but as the authors note, startups are important because they drive both employment gains and productivity growth. The news is good: in October 2023, three and a half years after the pandemic began, Americans were filing 59% more applications to start new businesses than they were before the pandemic. And that, as the authors note, occurred despite “recession fears, labor and supply-chain constraints, the highest inflation rates in a generation, and rapid interest rate hikes.” 

The problem: the 2010s was a good decade for a few tech giants, but not for startups. “Every year in the decade running up to the pandemic, the U.S. economy was missing around 100,000 new firms and the approximately half million new jobs that would have been associated with them each year — a partial but significant explanation for the grindingly slow pace of recovery from the Great Recession.” 

The authors discuss lots of economic reasons for the current startup surge (including higher household incomes during COVID, lockdown-related innovation, and the willingness of many working Americans to make a job change during such a trying period). But I think they missed an important reason. 

The more society changes, the more entrepreneurs come to the fore, meeting new needs and serving new markets. Advancing technologies in multiple fields certainly create new opportunities, from AI-fuelled production houses to singer-songwriters on TikTok. But as lifestyles evolve and change – with a big push from Covid’s impact – entrepreneurs at the forefront of personal, cultural, financial and lifestyle changes are emboldened to start new businesses and serve these new markets. And new technology is continually simplifying and empowering that process. 

In other words, a confident, pluralistic society advancing on all fronts is a startup-generating machine. 

The authors offer a few prescriptions on how governments can promote new business growth. Don't mess with success, they say: “Don’t make it harder to start a business than it already is.” They also support proposals for helping people save more for retirement (“de-risking entrepreneurship in the process”), and curtailing the use of non-compete contracts that block aspiring entrepreneurs from starting businesses that compete with their current employers. 

For non-Americans, the problem is that the surge the authors identified can't be found in most other countries (see chart). They assess Canada’s post-covid startup gains at 10% -- less than a third of the U.S.’s 34%. And way behind Belgium (up 25%), France (23%) and even the U.K. (16%). 

The federal government hasn’t done much for Canadian entrepreneurs in decades. Perhaps it’s time for them to revisit the best job-creating machine we have. Reforming HST (which turned micro-businesses into involuntary tax collectors) would be a good place to start.