Mike O'Donnell | Mar. 25, 2019

Rethinking Economic Development Policy Priorities

At every economic forecast event that I attended over the last few months, all the different presenters highlighted how many jobs Colorado was expected to create this year versus previous years. This was one of the first metrics discussed at each event.

In all its singularity, though, a number is just a number and doesn’t really tell anything about the rest of the story or why that number is what it is. There were news articles throughout the past year about this business closing or downsizing, and that business moving somewhere and adding jobs, so, being curious as I am, I thought I would look around to see if I could find some of the detail behind “the” number.

The Bureau of Labor Statistics (BLS) collects all sorts of amazing data and I found a fascinating series of data points for Colorado that looked at jobs being created, added, and/or lost by the age of the business creating those jobs or losing them. The bottom line was that the number of net new private sector jobs that were created in Colorado in 2018, according to BLS, was 59,981 but that was the result of 261,598 new jobs being created and 201,617 jobs going away.

There is obviously quite a bit of churn as jobs come and jobs go. With a private sector workforce approaching 2.8 million, about 7% of the population is displaced and then re-hired elsewhere each year, which seems like a lot to me. Then again, I’ve never seen this number anywhere else before so perhaps this is one of the dances the Colorado economy always goes through every year.  I’m sure it is very hard on those families that are subjected to it, nevertheless.

But what I did find incredibly amazing about the BLS numbers was the age of the firms adding and subtracting jobs each year.

The chart I created from this information shows how many jobs were added in 2018, either by startup businesses less than one year old, businesses expanding their workforce and/or businesses moving to Colorado, compared with how many jobs were subtracted by businesses either shedding jobs or closing their doors and laying off all employees.

A lot of economic development policy initiatives from state, county and local government levels focus on attracting existing firms to relocate to a new community or helping existing firms expand. Tax credits are a common tool to help with that although direct incentives may also be deployed, as “needed”.

But if you look at the chart, neither should ever be needed.

More than 100% of all the net new private sector jobs created in Colorado during 2018 were created by startup firms less than one year old. And this has been the case in Colorado for twenty of the last twenty-four years so it is nothing new and everyone should already know this. But I don’t think they do.

Startup firms almost never receive any help because tax credits are next to useless and most economic development policy initiatives are focused on existing firms. The presumption is that most startups won’t survive so why waste time and energy on them?

Let me suggest that any community wanting to build a vibrant ecosystem should ONLY focus their energy on startups because that is where all the jobs are being created. Older and more established firms, in the aggregate, subtract jobs from the Colorado economy each year.   

Ninety-nine times out of a hundred, entrepreneurs will launch their businesses where they want to live and if your community is attractive to entrepreneurs, they will move there and start firms. You don’t have to offer them incentives but you do have to have the necessary infrastructure in place, of course.

For those of you who are involved with crafting economic development policy, wherever you are, forget everything you learned at economic development school. If you want to create a great community and a great place for people to live, work and play, focus your energies and budgets on helping more small businesses get started.

Everything else will follow!