Rethinking Startups and Job Creation

There is a widespread belief that startups are great engines for the economy and for job creation. The myth is so widespread, it has a notable impact on where and how young people now approach their job search. If you survey a group of recent graduates or college students on the summer job market about their job search, most will say they are actively looking for work “at a startup.” The fact that young people are eager to join startups is no surprise. There is a sense that this is where the jobs are located and more importantly, it is where one can find a “dream job”—an opportunity to dress as you please, engage in interesting work, and even tap into opportunities for advancement. Sounds great, but there’s a problem. As an article published in this week’s Harvard Business Review reports, the widespread belief that jobs reside in startups may be a myth. Indeed, the article’s author, Daniel Isenberg, gives several reasons why we should be at least somewhat suspicious when approaching claims about startups and job creation.

Surprising Facts About Startups and Job Creation

26First, Isenberg observes that few people know how to define “startup.” On the one hand, there are those who simply define startup as any newly registered firm. Then, there are people who claim the startup isn’t just any new business but rather a state of mind, a way of doing business, an attitude, a lifestyle and even a feeling (yes, that’s right—a feeling). Then, there’s the problem of what happens to the few startups that survive and thrive. Are they still startups? When does a successful startup begin and end its life as a startup? In other words, are startups fueling the economy and job creation, or only those startups that live to outgrow their status as startups?

Second, there’s the question of what types of jobs startups create. Again, as Isenberg observes, while startups may be creating a lot of work for eager and energetic unpaid interns, there’s not a lot of proof that they are creating actual jobs. As he reports, “A study in the UK has shown that on the average, a startup reaches only $180,000 in revenues after its sixth year, barely enough to pay salaries. A recent study in Denmark has found that indeed, startups create quite a few jobs, but that a disproportionate number of them are low-skilled service jobs.” If this is true, one might conclude that startups are possibly finding and training talent but not necessarily creating jobs for this talent. Worse yet, one might conclude that startups are just creating low-wage jobs that only lead to more low-wage jobs.

Another key point made by Isenberg is that that economic research on startups is far from coherent. In the U.S. when most people think about startups, they think about California’s Silicon Valley and its legendary 30-year-old billionaires. A recent study, however, found that Montana, Wyoming, and North Dakota are the top startup states in the nation. Since none of these regions are known to have booming economies (quite the opposite) and all three states have higher unemployment rates than California, one has to wonder whether or not their apparent embrace of the startup is in fact helping at all.

Rethinking the Startup from a Critical Perspective

6To be fair, Isenberg doesn’t entirely dismiss the idea that startups may be engines of job creation. As he concludes:

The problem is not in the research or researchers – they are reporting empirical facts and often dealing with complex and incomplete data sets. The problem lies with those translating the research unthinkingly and uncritically into policy and practice. There is no doubt that some – a very small percentage – of startups, do indeed create some good jobs. But public and business leaders as well as policymakers in the U.S. and elsewhere must see startups accurately and in perspective in order to foster growth and long-term economic prosperity.

Should we abandon the startup as a site of hope? Not necessarily. But as Isenberg advises, when looking to startups as a model, we are well advised to critically assess both what we mean by “startup” and whether or not it is startups or more established businesses that continue to create jobs and more importantly, to create well compensated positions where young people can continue to grow over time.

June 7, 2016   Updated :June 7, 2016      

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