Entrepreneurs carry an almost limitless number of responsibilities, from pitching investors to refining products to conducting market tests. Some people would also add job creation to that list. While entrepreneurs do hire employees for their companies, job creation is never the end goal.
That’s why Silicon Valley’s startup boom hasn’t eliminated unemployment. High-tech businesses, in particular, thrive on innovation and automation. They aren’t interested in how many people they can hire; they want to know the most efficient and cost-effective way to produce goods and services.
This dichotomy raises the question: Do entrepreneurs truly create jobs? In all my years of teaching economic theory, I’ve learned that the answer is more complicated than many people think.
To understand the job creation paradox, we must examine Joseph Schumpeter’s creative destruction theory. Over time, the losses felt in outdated industries will become long-term economic gains. This value that entrepreneurs create leads to greater opportunities for innovation.
Of the many benefits that entrepreneurial innovation provides, there are a few that stand out as true forces for economic good:
1. Lower costs
Using fewer resources for an equal or greater output is always the goal in business. Companies strive to keep costs down while providing high-quality products and services. It’s how they compete and generate enough profit to continuously improve their offerings.
Companies might create new jobs at different points in the process, but that’s not an end in itself. Businesses don’t hire as many people as possible just for the sake of providing employment. In the end, thinking of startups as job creation vehicles actually contradicts good business sense.
2. Increased output
Tech innovation enables companies to reduce waste and boost output without adding resources. Assembly line mass production appears crude and inefficient to our modern sensibilities, but it was revolutionary for industry at the time. The assembly line method meant lower time and labor costs per item, increasing overall productivity.
The same principle applies to working remotely today. Firms that allow employees to work wherever they choose attract a wider range of qualified candidates. They can recruit from different countries and accommodate candidates who may need to be at home due to personal obligations. All of these factors enhance the firm’s ability to produce, leading to lower prices and a wider consumer reach using the same amount of resources.
3. Shifting consumption
Smartphones didn’t change how people talk on the phone, but they created unprecedented mobility. Consumers now rely on their phones for making plans with friends, paying bills, maintaining their schedules, finding entertainment, navigating and even avoiding awkward social encounters.
Innovative startups change consumer behavior by presenting new and better ways of solving problems. As entrepreneurs change the market and the technological landscape through products and services, the very world in which consumers work and interact follows suit, leading to more products and services in a continuous chain of evolution.
4. Shifting employment
Just as the invention of machinery spurred the move from agrarian to industrialized society, so goes the relationship between the invention of robotics and communications technologies.
Such shifts are mostly carrot, not stick. Industrialization didn’t force farmers to migrate to urban areas; it was about value creation. Farmers were struggling to survive, and machinery helped them increase the production of foodstuffs. Many people who once toiled in the fields opted for better-paying factory jobs and a higher standard of living in the cities.
The same is true in our modern age. Opportunities that didn’t exist or were once out of reach have now become low-hanging fruit. But these new jobs don’t always appear in the innovating sector. Silicon Valley isn’t hiring everyone who becomes jobless once startups disrupt their old-fashioned industries. But tech companies provide the means for job growth in other areas.
So the question remains: Do entrepreneurs create jobs? Yes and no. They replace inefficient firms that rely on human labor. In doing so, they free up resources and opportunities for other entrepreneurs. Innovation benefits all corners of the labor market — just not always at the same time.