New analysis shows the vast majority of job growth in Kentucky (and all states) comes from in-state companies, calling into question the state’s focus on recruiting out-of-state businesses to the Commonwealth. Findings also suggest under-investing in education, infrastructure and other essential supports for homegrown entrepreneurs and successful Kentucky businesses poses a great risk to future job growth in our state.
The new report from the Center on Budget and Policy Priorities shows that in all states from 1995 to 2013, between 8 and 9 of every 10 new jobs were created by start-ups and existing companies. Only a very small share – between about 1 and 4 of every 100 new jobs – were relocated from one state to another, with the remaining small share of growth coming from new branches of businesses headquartered in other states.
The data come from relatively new databases created by the U.S. Census Bureau and Department of Labor which allow analysts to track businesses’ job creation while accounting for buy-outs and re-structuring.
Conventional thinking about economic development and job creation policies are out of step with these facts. It’s commonly assumed that Kentucky must focus primarily on attracting out-of-state firms with lower taxes or tax breaks (or in the case of “right-to-work”, with lower wages). But these policies focus on a narrow source of growth and leave Kentucky with even less to invest in a workforce businesses can rely on and communities where people want to live, work and grow their businesses.
In other words, tax cuts and tax breaks leave states with less to support the main job creators. As the Center illustrates with a dynamic graphic, even though start-ups often fail, over the long term and on aggregate, they drive job creation. Start-ups (which by their nature are typically in-state endeavors) are also the incubators for the few but impactful “gazelle” companies like Amazon and Google that grow a disproportionate share of new jobs by creating new products, services and methods.
Proponents of the conventional tax-cutting approach to job creation also claim small businesses and start-ups (whose owners typically pay individual rather than corporate income taxes) will be able to hire more employees if their taxes are lower. But income tax cuts are poorly targeted to these businesses for a couple main reasons:
- Start ups tend to invest available resources in developing, producing and marketing their product, meaning profits are small if not non-existent. Income tax breaks aren’t an effective support for businesses that pay little to nothing in income taxes.
- Only about 14 percent of people own a small business, and less than 3 percent employ other people. That means such tax cuts would apply to the vast majority of people who do not directly create jobs.
So how can Kentucky support entrepreneurs? It’s a vast topic that many state and local governments, non-profit organizations and businesses are learning how to answer (KCEP’s parent organization, The Mountain Association for Community Economic Development (MACED), offers technical assistance, training, workshops, and business mentoring, among other services to small businesses in Appalachia).
But perhaps a guiding principle is to “do no harm” to public investments in the state’s workforce: a 2008 study from the University of Kentucky’s Center on Business and Economic Research found a statistically insignificant relationship between states’ economic growth and “business climate” variables like corporate and individual income taxes as a percent of total personal income and a state’s right-to-work status. However, “stock of knowledge” variables such as the average number of patents per resident in a state and the percent of the population with four or more years of college had the strongest (and a statistically significant) relationship with economic growth.