Enthusiasm over the economic benefit of tech startups needs some grounding, particularly when it comes to jobs.
While we argue in TechPORTFOLIO that startups have ended the industrial era, we should also acknowledge that many of the jobs startups create are fleeting and short on benefits. Moreover, the sheer number of traditional jobs in industries that grew throughout the 20th century make them a vital component of most economies even if their numbers are in decline.
The following stats help put the importance of startups as employment drivers into perspective:
In a 2015 study, Stanford Graduate School of Business professor George Foster examined more than 158,000 startups across the world, looking at each for five years. He found that jobs shed by companies in their fifth year equal 65 percent of that year’s new hires. This number, which shows the difficulty many companies have transitioning out of their startup phase, doesn’t account for jobs shed by startups that go bust. Nor does it count jobs lost as a result of startups disrupting a traditional industry.
In years three, four, and five, only 8 percent added new jobs. Foster shows startup job graphs less like a slapshot — with rapid year-on-year growth starting from zero – and more like “a high-speed game of snakes and ladders.”
The Stanford study also shows that among five-year-old companies, the most successful 10 percent account for 80 percent of revenue and job creation. That successful 10 percent also accounts for a lot of job loss, because companies can only lose money and jobs if they make it in the first place.
As Tech Republic notes, tech giants like Google and Amazon touch many facets of our lives, however they don’t come even close to companies like Wal-Mart (2.2 million employees in 2015), McDonald’s (420,000 employees in 2015) and Home Depot (371,000 employees in 2015) in job creation.
In a study by Oxford economists Thor Berger and Carl Benedikt Frey cited by Re/code, startups aren’t necessarily the job-creation engines they’re supposed to be. While IBM employs more than 400,000 people, Facebook has barely 7,000 employees. Part of the reason startups don’t hire as many people is because they often have software taking care of many human tasks.
According to a prediction by Carl Benedikt Frey and Michael A. Osborne from Oxford Martin School & Faculty of Philosophy in the UK, “47 percent of total US employment is in the high risk category, meaning that associated occupations are potentially automatable over some unspecified number of years, perhaps a decade or two.”
According to a 2014 Robert Half Technology survey of 2,300 IT professionals, a combined 84 percent said they would prefer to work at a mid-size or large firm. As Sarah McMullin of Camino Information Services explains in an article for Monster, one can expect lower pay, fewer benefits, and working longer hours. Startup employees are often on their own in saving for retirement.
For the past decade, growth in the U.S. industrial sector has lagged its average growth rate tracked since 1920. Growth topped the historic average of 3.79 percent in only 15 out of 120 months ending March 2016, and has been in negative territory since August 2015, according to U.S. Federal Reserve data. Industrial output in China, Europe and other regions has either seen declining growth rates, or outright decline.
The factors behind these numbers, including slower population growth, make it unlikely that industrial production will return to robust increases seen in earlier decades. Bring automation into the equation, and prospects for well-paying, full-time jobs with full benefits in the industrial sector weaken further.
While tech startup jobs still only account for a small portion of the labor pool, and might not offer the ideal in terms of job security and benefits, they will only grow relative to employment in the industrial sector.
Moreover, as technology developed by startups continues to occupy larger areas of our lives – from social networking to environmental remediation – jobs associated with these companies will become as important as assembly line work from a century ago, if not more.