According to data from the US Bureau of Labor Statistics (BLS), the amount of new companies founded annually increased from around 575,000 in 1994, to 675,000 in 2015. In stark contrast, the number of jobs new businesses create every year has dropped consistently in the last decade, from 4.1 million in 1994 to only 3 million in 2015—a 26% decrease. While some claim increased automation and outsourcing are responsible for the market’s apparent reluctance to create new positions, another explanation pinpoints a spike in tech investment as the culprit behind the decline in new jobs.
Nowadays, tech organizations are disproportionately founded—and favored by investors—because they are “scalable,” or able to handle growth without taking on new costs: primarily, the cost of hiring, training and equipping new employees. Investors naturally prefer to fund companies that can maximize profit margins. Because tech companies hire—and generally spend—less per dollar invested than companies that need incrementally more employees to handle an increased sales volume, they have the potential to generate revenues that dwarf expenses. This renders them highly attractive from an investor’s perspective.
Many tech companies benefiting from such investments produce technologies that propagate automation in industries such as manufacturing and retail, which also contributes to net job loss. Unsurprisingly, any successful app or tool that aids in digitizing tasks traditionally performed by employees plays a part in rendering old jobs obsolete. Department store employment, for example, plummeted 46% between 2001 and 2016 as the tech sector expanded, according to BLS statistics.
The tech arena’s financial force is apparent when comparing businesses that deliver many services digitally to companies with traditional business models, such as General Motors (GM). From 2006 to 2016, GM’s revenue per employee dropped slightly, from $739,285 to $737,777. Apple, on the other hand, grew its revenue per employee by around $940,000 in the past decade. Also, by dividing each company’s 2016 market cap by their number of employees, the value per Apple employee comes out to around 22 times greater than that of GM employees. The comparison is extreme, however, Apple’s ability to achieve such unmitigated growth exemplifies the very scalability that entices today’s investors.
When it comes to new employment, technology companies’ prevalence in the market isn’t necessarily a negative. If the government can increase funding for tech incubators, more individual startups can grow. While each new tech company may employ less individuals on average than other business types, increasing the net amount of tech companies will generate more jobs overall. Reducing the corporate income tax rate to 15% may also benefit employment, as it will free up funds for investment.