CBPP Report: State Job Creation Strategies Often Misguided

State economic development policies that focus on deep income tax cuts or tax breaks to lure companies from other states ignore fundamental data points about job creation, and as a result are more likely to fail, according to a recently released report from the Center on Budget and Policy Priorities. While alluding to the importance of encouraging entrepreneurship and firm survival more broadly, the authors also argue that public investments should be targeted at helping build a skilled workforce and improve the quality of life for residents.

Written by Michael Mazerov and Michael Leachman, two researchers from the Center on Budget and Policy Priorities, State Job Creation Strategies Often Off Base uses data from new databases developed by the federal government to track the job-creation record of specific businesses of various sizes and ages over time to shape their argument. The authors use this data to detail two fundamental points about job creation that are critical to their argument.

The first point illuminated by the data is how startups and young, fast-growing companies are responsible for the most new jobs during periods of healthy economic growth. The outsized role of startups in job creation has a lot to do with how the term is measured; by definition, startups in their first year can only create jobs. Overall, while evidence shows that most startups fail within five years, and most firms that survive do not grow, within these surviving firms there are high-growth firms contributing disproportionately to job growth and net-job creation. Mazerov and Leachman suggest that states should focus on cultivating these young, high-growth firms – the gazelles – as the centerpiece of their economic development agendas.

Second, the authors note that the majority of jobs created in a state come from those businesses that start up or are already present in the state, not by relocation. From 1995-2013, the entire period for which there is complete data from the National Establishment Time Series (NETS) database, 87 percent of all gross private sector job creation was “home grown,” meaning it came from either startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state. On a state-by-state basis, this share was relatively consistent; startups and expansions accounted for anywhere between 82 percent (Delaware) and 91 percent (New York) of total job creation. The authors also find that just 3 percent of job creation came from firm relocation across state lines. Additional state-by-state information can be found in Figure 2 of the report.

By failing to consider the two driving points behind job creation, the authors make the case that many states are currently pursuing failing economic development strategies. For example, the authors consider income tax cuts for small businesses misguided because four-fifths of small businesses have no employees beside the owner, and the revenue losses that come from income taxes impact education funding. Tax and non-tax incentives meant to attract out-of-state companies could also be considered misguided because firm relocation plays such a small role in total job creation. Instead, the authors argue policymakers should focus on encouraging entrepreneurship generally, helping new businesses to survive, and enabling businesses with high-growth opportunities to fulfill their potential. Furthermore, they suggest states should continue to provide high-quality public education, transportation, and recreational opportunities to build a skilled workforce and the quality of life high-growth entrepreneurs seek.