The NYT's Romance of Start-up Businesses
|Friday, 05 October 2012 05:09|
Politicians and the media just LOVE start-up businesses. We got another example of this relationship in an NYT piece on start-ups hiring fewer workers that told readers:
"But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs."
Actually the economy always grows faster than employers add jobs because of productivity growth. It would be very scary if productivity growth vanished, which would mean that we are not getting wealthier collectively. In other words, there is zero mystery to be explained, businesses are not hiring because the economy is not growing fast enough.
The relationship more generally between start-ups and job growth is also misrepresented. The piece told readers:
"For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977."
This assertion likely will lead readers to believe that we would need start-ups to create jobs. That is not true. Start-ups are a substitute for expanding existing businesses, often by choice. In many cases businesses find it more attractive to buy up a new firm in a sector that can show that it has a successful business model rather than expanding its own operations. If it lacked the opportunity to buy a new firm then it would simply expand itself.
The NYT piece is trying to imply that this accounting relationship (that job growth was concentrated in new firms) into a causal relationship. This would be comparable to a situation in which we found that all the hob growth in the United States was in states west of the Mississippi and thereby concluding that if we did not have the West there would have been no job growth. This is of course not at all an implication of finding that the job growth had been located west of the Mississippi. If firms did not have the option of expanding west of the Mississippi then they would have expanded east of the Mississippi.
While it's great that people have the opportunity to start businesses and pursue their aspirations, that is not an excuse to make up stories about how they affect the economy. The NYT should know better.