NYT: The Costs of Entrepreneurial Job Creation

By Scott Shane

Based on the interest in my post about estimates of entrepreneurial job creation, I would like to explain how I calculate these numbers. My analysis is debatable, but I will outline the assumptions behind my figures so you can decide for yourself.

There are four key assumptions to calculate the job creation numbers: (1) the amount of money it takes to motivate someone to begin the entrepreneurial process, (2) the percentage of people that begin the entrepreneurial process who create a business, (3) the percentage of newly created businesses that employ anyone (employer firms), and (4) the number of employees in the average new employer firm.

Assumption No. 1Surveys of entrepreneurs consistently reveal that the biggest deterrent to starting a company is lack of capital; and natural experiments in which people receive random financial windfalls from lottery winnings show that an unexpected capital infusion encourages people to start businesses. So, to get people to start the entrepreneurial process, we need to overcome their lack of capital.

A representative survey of new business start-up efforts in the United States indicates that the typical (median) entrepreneur needs $15,000 to pursue a new business idea and can provide $6,000. Therefore, we need to give the typical person $9,000 to overcome this capital gap so he or she can start a business. (more)