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Mathematic Inevitability: Young Firms and Job Creation

Mark Marich on April 14, 2010 Source: Policy Dialogue on Entrepreneurship


Paul Kedrosky, senior fellow at the Kauffman Foundation, has a very interesting post on growthology.org ("Drunks, A Wall, Entrepreneurs and Jobs") where he explains the mathematic inevitability of the relationship between young firms and job creation. He parallels the relation to the "drunkard's walk" concept of the law of randomness:

It works like this: Imagine an inebriated bar-goer having exited the bar, and now standing outside along the wall. Imagine further that in his or her state every single step is random, a coin flip whether it will be toward or away from the bar wall.
At first, however, the bar-goer is at the wall, so further steps toward the wall can’t happen. The only direction he or she can go with that first step is toward the curb. After that things change, of course, with at least some steps toward the wall possible, after which the drunkard is back at the wall and unable to go further. Given enough time, and with 100% probability, the drunkard will eventually end up in the gutter away from the wall.

….

The same holds in job creation. Young companies are the single-celled paramecia of the economic world: at t=0 they stand at the bar wall facing the gutter. They can’t lose jobs because they haven’t created any yet. All they can do initially, other than fail, is stagger away from the zero employment wall. Now, we know that about half of young companies last five years, more than enough time for companies to stagger back and forth such that, even if we assume no managerial skill, the drunkard’s walk model tells us they will grow and add jobs, even if only because that left bar wall prevents them from going below zero jobs.


Read the entire post for the full analogy demonstrating the inevitability of job creation from young firms.  

Category:  General 

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