Improving Job Creation Policy

Improving Job Creation Policy

How an investment in data collection led to better policies for entrepreneurs.

In November 2016, on the final day of what President Obama had designated as National Entrepreneurship Month, the White House released its list of top achievements on behalf of entrepreneurs. The list included such accomplishments as its “Startup in a Day” initiative, which encourages local governments to streamline licensing and permitting processes for new entrepreneurs, and the passage of legislation to expand access to capital for small businesses.

Many of the public policy shifts on this list were informed by evidence from rigorously compiled datasets – information that did not exist a decade ago. The Obama Administration is in fact the first to deploy an evidence-based approach to policymaking around entrepreneurship. The Trump Administration—with an entrepreneur at the helm—will presumably maintain this policy focus on entrepreneurship. And, as they seek regulatory and tax reforms, Republicans in Congress should also be expected to keep entrepreneurs a top priority.

Those efforts, like the work of the Obama Administration, will be limited by the amount and quality of data that informs them.

While entrepreneurship has always held a hallowed place in the American mind, it has also always been surrounded by myths. Most people think of entrepreneurship as either mom-and-pop small businesses or as Silicon Valley startups with nothing in between. We didn’t have a solid understanding of the dynamics of job creation by different types of firms. We didn’t have a good idea of what entrepreneurs contributed (or didn’t) to productivity. And we had only a dim notion about trends in American entrepreneurship.

Today, however, we know that young firms are a bigger net contributor of new jobs than small businesses. We know that new businesses are more productive than existing ones. We know these and other things not because of intuition, case studies, or news stories but because of long-term investments in public data and dedicated efforts to use those data. The Kauffman Foundation had the privilege of participating in this data revolution and in applying insights from data analysis to improve public policymaking for entrepreneurship.

In 2004, the Kauffman Foundation awarded a $950,000 grant to the National Academy of Sciences to support the formation and work of the Panel on Measuring Business Formation, Dynamics, and Performance. Its charge was to study the contemporary state of federal statistics on business dynamics and make recommendations for improvements and innovations.

Three years later, in 2007, the Panel produced its report, Understanding Business Dynamics: An Integrated Data System for America’s Future. Despite its less-than-thrilling title, the report had major subsequent impact on policy. Among other things, the Panel recommended the expansion of data on “young and nascent businesses.” It also urged federal statistical agencies to expand public use of such data, especially by those involved in policymaking.

We know that young firms are a bigger net contributor of new jobs than small businesses. We know that new businesses are more productive than existing ones. We know these and other things not because of intuition, case studies, or news stories but because of long-term investments in public data.

To help implement the Panel’s recommendations, Kauffman awarded a follow-up grant of $600,000 to the University of Maryland to support the work of John Haltiwanger and a team of researchers. This team worked closely with the Census Bureau to create the Business Dynamics Statistics (BDS) dataset, which provides detailed employment information on all employer firms in the United States.

At the same time, the Kauffman Foundation—with the leadership of senior fellow Alicia Robb—created the Kauffman Firm Survey (KFS), a longitudinal survey of 5,000 businesses that began 2004. Many other individuals—too many to list here—contributed to the Census and KFS developments. The latest chapter in this story is the creation, by the Census Bureau and Kauffman, of the Annual Survey of Entrepreneurs (ASE), which promises another round of insights.

The BDS data have been transformative. For the first time, there were publicly-available data on the entry, exit, growth, and shrinkage of American businesses. Most importantly, the BDS had information on firm age. This seemingly minor improvement to economic data opened up a panoply of insights on economic activity. In addition to the findings on young firms and job creation and productivity discussed above, we learned that:

• High-growth firms, a sliver of total firms, create a disproportionate share of new jobs. These high-growth firms are overwhelmingly young.
• Job “churn”—the movement of jobs and workers between firms—is good for productivity, wage growth, and economic mobility.
• Most employment creation by new and young firms sustains over time. In fact, on an annual basis, young firms are a far less volatile source of new jobs than their older and larger counterparts.
• While the volume of business creation was fairly steady through the 1980s, 1990s, and 2000s, the rate of business creation has been falling.
• Businesses have also been “starting smaller” and “staying smaller” over time.
• Across states and metropolitan rates, there is considerable variation in rates of business creation and growth.

These findings were published and promoted in 2009, 2010, and 2011, at a time when many were casting around for the answer to the question asked by one Kauffman report: “Where will the jobs come from?” The answer, it turned out, was new companies and fast-growing young companies. Thus, we needed to figure out better ways—both publicly and privately—to encourage the formation and growth of new firms.

It’s difficult to pinpoint a moment at which the public consciousness absorbed these findings, but one key moment was the 2011 introduction of the first bipartisan Startup Act in Congress, and the creation of Startup America (and the Startup America Partnership) that same year. These public and private efforts drew full national attention to the economic and social role of new and young companies.

In the spring of 2012, Congress passed and President Obama signed the Jumpstart Our Business Startups (JOBS) Act, which was predicated on the important economic role of new firms. The JOBS Act benefited from research insights on the relative use of debt and equity by entrepreneurs, derived from analysis of the KFS data on the capital structure of new businesses. Because research found that new businesses relied heavily on bank debt, which shriveled during the financial crisis, the JOBS Act opened up new pathways of raising equity financing, including crowdfunding from non-accredited investors.

The importance of young companies was also captured in the tax bill passed by Congress at the end of 2015, which included provisions to make the R&D tax credit usable by young businesses. States and cities across the country have also put more and more effort into helping entrepreneurs because of these developments on the federal level and their access to this new data.

In addition to informing policymakers, better data helped create a larger space of credibility for entrepreneurship support organizations, equipping them with more precise information for their work. Better data has also allowed us to question some longstanding assumptions. Lower levels of business creation, for example, can sometimes be productivity-enhancing. In retail, for instance, the expansion of national chain stores has boosted productivity more than the creation of many independent retail shops. In other cases, higher business creation rates are actually cause for alarm, as with the boom of small construction firms during the housing bubble.

Kauffman’s original interest in supporting the creation and use of data was to build a stronger base of evidence that could generate more and better research on entrepreneurship. Ultimately, our goal is to help create a more entrepreneurial economy, with higher rates of entrepreneurship and business growth. But to do this right requires more than just assumptions and myth. It requires the data and evidence necessary to construct sound public policy that will genuinely benefit the nation’s entrepreneurs.

Now, the Trump Administration and Congress have a solid base of data on which to construct policies to benefit entrepreneurs. Forthcoming data from the new ASE will strengthen this foundation. Entrepreneurs everywhere should take heart that economic policy will be designed with accurate and timely data.

Dane Stangler works at the Kauffman Foundation.