A couple of University of Wisconsin-Extension economics researchers have a message for the state: It’s the startups, stupid.
Tessa Conroy and Steven Deller recently completed a study showing that Wisconsin job growth is fueled by newer, smaller businesses. But the report says state policies tend to boost larger, more established businesses.
That might help explain why job growth in Wisconsin lags well behind the national average — 7.6 percent for the state versus 11.2 percent for the U.S. over the past five years.
“Given the importance of new startups to job creation, the relatively low ranking for Wisconsin helps us better understand why Wisconsin’s recovery from the Great Recession has been one of the slowest in the U.S.,” the authors write.
In discussions about job creation, talk often turns to types of industries. In Wisconsin, policymakers often blame dismal job numbers on slowdowns in the manufacturing sector or the decline of the paper industry. Conroy and Deller sought to change the focus of the discussion from the types of industry to the age and size of the business venture. Their findings showed that newer, smaller businesses rule. And without new startups, according to the study, Wisconsin would be “experiencing a significant job loss.”
In the study, Conroy and Deller found that nearly 50 percent of job creation in Wisconsin is done by businesses between 0 and 5 years old, about half of them from businesses less than a year old, and which have few employees.
And the performance by Wisconsin startups is fairly lackluster compared to the rest of the country. For jobs created from newly birthed startups in 2012 — the most recent year for which data was available — Wisconsin ranked 47th among the lower 48 states.
“In Wisconsin, and across the nation, new business startups are key to job creation,” the researchers note. “Equally important is the survival rate of those new startups. The question is: Can Wisconsin craft policies that encourage new business startups and support them in the key first three to five years of operation?”
There are jobs, and there are potential jobs. The latter often come in the form of the state’s non-employer businesses, which have increased in number by 25 percent since 2000, accounting for 71 percent of total businesses in 2013. These businesses, the smallest businesses in the state, are concentrated in non-farm agriculture, fishing, hunting, real estate, the arts and entertainment. They don't have employees, but they generate economic activity, and if they grow can lead to hiring employees. But again, according to the report, Wisconsin lags both the U.S. and neighboring states in the creation of non-employer businesses.
The study didn’t include a look at where new startups were concentrated. But data supplied by Deller in response to a follow-up question show that increasingly, they’re in the Madison area. According to the U.S. Census Bureau’s Business Dynamics Statistics, Madison area jobs created from new startups increased from 10 percent of the state total to 12 percent from 1977 to 2013.
But Deller said that startups aren’t where the money’s at — state job-growth money, that is.
“The bottom line to the analysis is that nearly all of the net new job growth comes from new business startups, most of which tend to be small,” said Deller in a written response. “This growing importance of ‘entrepreneurship’ is something that economists have known about for years, but policies still tend to favor larger established (older) businesses.”
He points to Wisconsin Economic Development Corp. policies that favor larger manufacturing firms over smaller startups. While WEDC boasts some startup successes, the bulk of its efforts focus on “larger established firms, a lot of paper making and manufacturing."
Indeed, while a WEDC webpage touting the agency's successes includes some high-tech examples, it's heavy on large corporations or multinationals like papermaker Pratt Industries, global manufacturer Gardner Denver and Ireland-based Kerry Ingredients.
And WEDC’s tax incentives come with requirements in terms of the numbers of jobs created that very few startups meet.
In addition, Deller said, WEDC also focuses on luring existing businesses to the state, which in reality rarely happens.
“Very few companies really move around that much,” he said. “The vast majority of startups are located in the community that the owner lives in.”
So why doesn’t the state put its money where the jobs are? Deller, who’s not been shy about criticizing state economic policies in the past, has a theory.
“In today’s increasing pressure to raise money, politicians are drawn toward those larger, established firms because they have the resources to make significant contributions,” he said. “Smaller startup firms are not in a position to be proactive in terms of significant donations.”
Add to that the fact that startups — unlike large corporations on a continual hunt for policies that boost their bottom lines — don’t lobby. They’re “too focused on the business and do not have the resources to actively lobby,” Deller said.
And startups rarely draw media attention, which lowers their standing among attention-seeking politicians.
“The creation of 50 new businesses each with, say, two employees, does not draw the same media attention of one firm with 100 employees moving into or expanding in an area,” said Deller. “Politicians are looking to be associated for business activity that draws media attention.”
Finally, there’s the “big-deal” syndrome.
“Investment bankers, for example, find it more rewarding to work on one very large, multimillion-dollar deal than several smaller ones,” Deller said. “The same holds true for many economic development practitioners.”
To counter these factors, Conroy and Deller recommend a multi-pronged approach to encouraging new business ventures, including educational opportunities from the state universities and technical colleges to local efforts by chambers of commerce and business associations to match entrepreneurs with workshops and mentors.
They also suggest boosting financial support on the state level through loan guarantees and other programs.
And the community can pitch in by simply choosing to buy local.
“Given the disproportionately large share of job creation from new business startups, supporting entrepreneurs may be one of the most effective,” the report says. “Support for new business owners, even those that do not yet have employees, could lead to higher gross and net job creation.”