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Economists Suggest Silicon Valley Startups Aren't Really Creating Many Jobs

Wealth creation and job creation aren't the same thing.

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Politicians love praising the economic power of Silicon Valley, even though economists say startups that power the tech industry don’t create all that many jobs.

Even as she noted the tenuous economic position of so-called “sharing economy” workers, Hillary Clinton has praised the “exciting opportunities” created by companies like Uber and Lyft. Marco Rubio has a chapter in his book that’s literally called “Making America Safe for Uber.” And on a visit to the offices of Thumbtack, an online odd-jobs marketplace that’s valued at more than $1 billion, Jeb Bush said such companies allow people to “customize their own dreams.”

However, various economic studies indicate that technology startups — while increasing productivity and perhaps transforming the structure of our economy — don’t necessarily create all that many jobs. Take this recently published paper from Oxford economists Thor Berger and Carl Benedikt Frey, “Industrial Renewal in the 21st Century: Evidence from U.S. Cities.” The highlights are ours, originally flagged by the American Enterprise Institute’s Jim Pethokoukis:

The magnitude of workers shifting into new industries is strikingly small: in 2010, only 0.5% of the US labour force is employed in industries that did not exist in 2000. Crucially, it is found that many new industries of the 2000s stem from the digital revolution, including online auctions, internet news publishers, social networking services and the video and audio streaming industry. Relative to major corporations of the early computer revolution, the companies leading the digital revolution have created few employment opportunities: while IBM and Dell still employed 431,212 and 108,800 workers respectively, Facebook’s headcount reached only 7,185 in 2013. Because digital businesses require only limited capital investment, employment opportunities created by technological change may continue to stagnate as the US economy is becoming increasingly digitized

Pethokoukis, an economics columnist at AEI, linked to the study in a recent blog post about yet another paper from the University of Maryland suggesting the same thing back in March. He told Re/code in a phone interview that “there’s a lot of research out there indicating that the number of new U.S. firms as a share of all U.S. firms has gone down since about 1980.”

“What I think the Oxford study is saying is that you’re not getting the kind of job growth from these kind of high-tech, high-growth, high-profitability startups that you had in the past,” Pethokoukis said.

And why is that?

“One theory is that companies over the last 10-15 years, unlike in the ’90s, don’t need to hire as many people because the software — loosely described as machines — is doing the work,” he explained. “It’s the classic case of how many people actually work for Facebook versus its market capitalization. Another theory is that a lot of these companies get bought up or they fail — and if you fail, you can’t hire more workers.”

The story that Pethokoukis is telling about technology-powered economic growth displacing workers isn’t new at all. What’s different in 2015 is that some of the biggest, most highly valued startups tout themselves as among the biggest and most crucial job creators in the world. Uber CEO Travis Kalanick, for example, said in a company blog post late last year that he anticipated that Uber “will generate over one million jobs in cities around the world” in 2015 — even though the on-demand, 1099 workers he was talking about don’t have the conventional protections or stability of W-2 jobs.

Pethokoukis was quick to point out that even though tech startups may not create many new jobs, that doesn’t change how much wealth they’re able to create.

“You can still be really, really productive and innovative and not be a high job generator,” Pethokoukis said. “The nature of these companies is what’s changed.”

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