Business Startups Create the Majority of Economic Growth

May 29, 2013

The U.S. economy was built upon the ingenuity and hard work of small businesses, and even today in the modern business world the success of these small businesses affects the economy greatly. Contrary to conventional political wisdom, recent studies have suggested that small business startups may affect the economy disproportionately, but new business startups that create new employment opportunities are what drives economic growth, says Benjamin Zycher, an economist for the Pacific Research Institute.

Zycher shows that employment creation by new startup firms positively affects state gross product, using a sample of 49 states for the period 1977 through 2010.

  • An increase in the number of startup firms does not affect state gross product or its growth rate, but an increase in net job creation by startups has a positive effect on state gross product that is significant both economically and statistically.
  • Each net job created by startup firms is estimated to increase state gross product by almost $1.2 million in a given year.
  • This means that startup job creation shifts the trend line of state gross product upward, which creates economic growth.

Based on these findings, it is necessary for the government to make foundational changes in how they treat startup businesses.

  • Bank Policy: A reform of Dodd-Frank financial services legislation is necessary because it has had the effect of increasing the competitive advantages of large banking institutions over smaller banks, the latter of which traditionally have specialized in providing capital for new and small businesses.
  • Health Care Policy: The Affordable Care Act ("Obamacare") has created rigidities, constraints, and incentives in the labor market that will lead to higher costs for labor force creation and expansion, so it must be reformed or abolished to benefit the economy.
  • Wage Policy: Increases in the mandated minimum wage by federal or state legislation will increase disincentives to hire, so the government must reform the policy.
  • Immigration Policy: Current policies on immigration and work permits for foreigners have introduced serious rigidities into the labor market generally and for smaller businesses, start­ups, and particular sectors.

Reforms of these specific areas would substantially increase economic growth.

Source: Benjamin Zycher, "Startup Businesses and the Growth of Real State Gross Product," Pacific Research Institute, May 2013.

 

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