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America is knee-deep in problems. Too much debt. Crazy banks. A broken tax system. Dysfunctional legislatures. Wacky energy policies.
What we do have going for us, unquestionably, is a culture of innovative entrepreneurs. It's the best in the world, easily. I don't think that's biased or nationalist. The U.S. has fostered the most innovative companies in the world for at least the last century. Fact.
But our culture of entrepreneurialism may not be what you think.
Take self-employment. Going out on your own is seen as a hallmark of innovation. Across the globe, however, the U.S. has one of the lowest rates of self-employment:
Source: Center for Economic and Policy Research.
Not only does the U.S. rank near last, but the opposite of what most would expect seems true: Countries with the highest rates of self-employment form a who's-who of economic misery, while countries with the lowest rates of self-employment tend to have strong, stable economies.
The same conundrum holds for small businesses, which are also seen as a stamp of innovation. Among large nations, the U.S. has one of the lowest shares of employment in small businesses in areas like manufacturing, technology, and research and development -- a third lower than the U.K.
What's going on?
You've surely heard the drumbeat that says small businesses are the key to job growth. It's the mantra of both political parties. And it makes sense: Small businesses are the most eager to expand, so they surely must create the most jobs.
But it isn't quite that simple. The majority of new jobs don't necessarily come from small businesses. They come from new businesses.
As The Economist writer Greg Ip points out, "Small companies destroy just as many jobs as they create; they aren't disproportionate job creators." Meanwhile, a study by the Kauffman Foundation found that from "1980-2005, nearly all net job creation in the United States occurred in firms less than five years old." Furthermore, "If one excludes startups, an analysis of the 2007 Census data shows that young firms (defined as one to five years old) still account for roughly two-thirds of job creation, averaging nearly four new jobs per firm per year. Of the overall 12 million new jobs added in 2007, young firms were responsible for the creation of nearly 8 million of those jobs."
True, most young businesses are small. But most small businesses aren't young. That's where most trip in the argument that small businesses are the key to job growth. If jobs are the priority, the target for policymakers should not be size, but age and innovation. This is why so many are concerned with the pathetic state of the U.S. Patent Office. David Kappos, the Patent Office's director, was asked last year how many jobs he reckoned were being held back by patent backlogs. "Millions" he replied.
There's more to the job conundrum. A surprisingly small number of companies create almost all the new jobs. Economist David Birch calls these companies gazelles, in contrast to elephants, which employ many people, but don't create many new jobs, and mice, which employ few people and create few new jobs. Greece may have more self-employed entrepreneurs than America, but the majority are mice, working in agriculture and street-vendor shops that rarely, if ever, grow.
Birch's findings on the American job market are staggering. Gazelles, which make up around 4% of firms, create as much as 70% of new jobs. During some periods, gazelles created more jobs than the entire economy, as all other firms shed more jobs than gazelles created. Another characteristic of gazelles: They're very young.
Examples of gazelles are companies like Google (Nasdaq: GOOG), Facebook, Groupon, and Netflix (Nasdaq: NFLX). These aren't small businesses by any definition. They are, however, young, and incredibly innovative. They're the kind of companies that create jobs -- nearly all the new jobs in America. America might not have the most entrepreneurs. We don't have the most small businesses. What we have is a culture conducive to breeding gazelles. And that, thankfully, is the key to job growth.
This doesn't mean there's no room for improvement. Our employment situation is a mess (or did you already know that?). The Kauffman Foundation sums this all up nicely:
Virtually all of the attention among policymakers and the media has focused on the waiting game by larger firms, currently reluctant to take back employees they dismissed, and unwilling so far to begin hiring new employees again … This attention is misplaced. The overwhelming source of new jobs is new firms. The key implication for policymakers concerned about restarting America’s job engine, therefore, is to begin paying more attention to removing roadblocks to entrepreneurs who will lead us out of our current (well-founded) pessimism about jobs and sustain economic expansion over the longer run. This much-needed shift in focus cannot come soon enough.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.