Do startups really create jobs?

James Riley
Editorial Director

Last week wrote about a new report from StartupAUS, called ‘Economy in Transition – Startups, innovation and a workforce for the future’. It looked at the way changes in technology were threatening existing jobs and creating new ones.

A limitation with the document was its failure to quantify the number of new jobs that would be created with new technologies. It has become an article of faith to many that new technologies and new business models will lead to a growth in employment, and that over time job growth in the new economy will replace job growth in the old economy.

This is a reasonable assumption. After all, ever since the industrial revolution began 250 years ago there has been a steady movement in employment, at first from agriculture into manufacturing, and in the subsequent information revolution from manufacturing into the service industries.

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This seems an immutable fact of life. Jobs move from primary industry to secondary industry, then from secondary industry to tertiary industry. As this process evolves we are even seeing lots of jobs in quaternary industries – those that service the service industries.

Now, in Australia in the 21st century, the issue of jobs and where they are coming from has become a major issue. The relative ramping down of the mining industry and the resources boom has caused an economic downturn, so the argument goes, and the technological optimists say that the slack will be taken up by the so-called information economy.

There are a few problems with this scenario. One is that the mining boom never provided anything like the number of jobs that popular perception said it did.

Even at its peak, mining employed fewer than 200,000 Australians, though of course it is argued that there were many flow-on jobs.

But the flow-on job argument can be made of most industries – all sectors of the economy are related to each other. Even today, the much maligned manufacturing industry in Australia employs nearly a million people, five times as many as mining.

But it is true there was a mining boom, and it is true that activity is declining, and it is true that manufacturing is in relative decline. Does it then follow that the new jobs are being created in new industries? Yes, and no.

The number of people employed in the flagship new era industry sector of ‘information, media and telecommunications’ has actually declined in Australia over the last four years, according to the ABS. The number in ‘financial and insurance services’ has remained about the same. The growth has been in construction, retail, and hospitality. It is very instructive to actually look at the ABS data sometimes.

Which brings us to the really big question. Do startups really create lots of new jobs? The startup industry would have us think so, but it is hard to find real evidence. One good source of information is an excellent report published last year by the Department of Industry, Innovation and Science (DIIS), called the Australian Innovation Industry Report’.

This excellent document has been published annually, which means another one is due soon. Unfortunately it seems to have been released under the Official Secrets Act – the Department published it with no publicity and it was little commented on at the time. You should read it – it is excellent.

“Australia has one of the highest proportions of start-ups and young firms among small businesses in the OECD,” says the report. “As is the case in many other advanced economies … start-ups and young businesses contribute disproportionately to job creation in Australia. However, it is only a relatively small percentage of very high growth businesses that make up the bulk of this contribution.”

The report cites academic studies and various pieces of data to show that start-up businesses added approximately 1.44 million jobs to the Australian economy between 2006 and 2011, while older businesses (three years old or more) shed just over 400,000 net jobs over the same period. Rather definitive, it would seem.

But not so fast. There is no accepted definition of ‘startup’. The DIIS report takes the broad definition of any company less than two years old, whereas many in the startup community prefer to narrow the definition to include those that use information technology. Even StartupAUS confines itself to ‘tech startup’ businesses.

This is a narrow definition, and it can be argued that these companies, while they attract the lion’s share of attention, are not actually that important when it comes to job creation

Most startups, if by that we mean companies that have just started up, are in more traditional industries. A recent NAB report into entrepreneurship in Australian found that the most common type of business most people aspire to is starting a coffee shop.

A sobering note on the role startups play in job growth comes from a recent study in the respected Harvard Business Review, ‘Do Startups Really Create Lots of Good Jobs?’ The answer from this interesting little piece is ‘no’. It is sobering reading. It makes a number of points about what it calls the “widely accepted policy fact”.

  • There is no standard definition of startup, and “survivor bias” means we tend only to take notice of the successful ones. Most fail.
  • Many startup jobs are low skilled and low-paid.
  • Countries with high numbers or startups are often economic basket cases Uganda and Thailand are top of the list. “The amount of entrepreneurship in a country is negatively correlated with its national competitiveness.”
  • Correlation does not imply causation. ”Even assuming … that most new jobs are indeed found in new firms, it still does not necessarily follow that increasing the numbers of new firms will increase the numbers of new jobs. All successful startup-rich regions had quite large corporations in their pasts infusing the ecosystem with talent, connections and knowledge.”

None of which is to say that a startup is not a Good Thing, and we should not be encouraging them. But we need to look at the big picture, across industries and across different types of company.

A realistic and widely accepted definition of the term would be a good start.

Do you know more? Contact James Riley via Email.

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