In 2009, Sawyer Sparks turned down a $300,000 Shark Tank deal for his gluten-free modeling-clay startup, Soy-Yer Dough. Kevin O’Leary, in a very Mr. Wonderful move, had insisted Sparks move production to China. That would have killed Sparks’s dream of creating jobs in his hometown of Bloomfield, Indiana. Nine years later, Soy-Yer Dough is still a small company, with just eight employees. Sparks says he has enough business to employ 20 but can’t find enough good people locally. If he buys new equipment, that’s three people he doesn’t have to hire. But he’s been hesitating. “The business side of me knows equipment is the proper way to go,” says Sparks. “The humanitarian in me wants to be able to offer more jobs.”

The data shows that fast-growing companies are hiring fewer people, even as revenue swells–and even while it’s the credo of politicians, the press, and entrepreneurs that starting companies means creating jobs. Founders choke up talking about their full parking lots and how many employees’ children they’ve helped put through college. In economically challenged regions, starting a business is considered among the highest of public callings.

But in 1997, about 3 percent of firms with 10 or more employees had notched at least 20 percent annual employment growth over three years, reports the Bureau of Labor Statistics. By 2012–the most recent year for which data is available–that share had fallen roughly one-third. That same year, the average number of employees added from a company’s launch through year five hit the lowest level since the 1990s, according to the Kauffman Foundation. That level has risen since, but it’s still far below where it was in the ’80s. New and growing companies are the most prolific job creators, but the number of jobs they create is falling.

Job gains at high-growth firms–measured over a three-year stretch–have slowed considerably since the ’90s.
Source: Bureau of Labor Statistics

Despite the warm feelings generated by creating jobs, employees are a cost–something businesspeople want to minimize. What’s changing is companies’ ability to get by with fewer and fewer people thanks to the (growing) litany of tasks that can be digitized and automated. In 2018, building for success increasingly means building lean.

Job creation is lionized by politicians and society, so founders like to discuss it, says Scott Shane, an economics professor at Case Western Reserve University. But few understand the current math. “If you have a company that increased employment by 50 percent and tripled its revenue, and people ask, ‘Did you grow employment?’ the CEO’s answer is yes,” says Shane. But “what is not being captured in the discussion is that every additional dollar of revenue is being produced with fewer cents of labor.”

Surveys of the Inc. 500 suggest reasons that go beyond dollars. Year after year, CEOs say their greatest obstacle to growth is finding and keeping good people. But founders figure out ways to do without when resources are scarce–and business models built for periods of low unemployment don’t need to change when labor is abundant.

And, of course, founders don’t like having to fire those they hired. In 2017, more than a third of Inc. 500 CEOs said that worry about employees’ livelihoods weighed against their decision to start a business. (The only more common concern: fear of failure.) For leaders of small companies, who know each employee personally, such misgivings are keenly felt.

That doesn’t stop founders like Sparks (who expects to employ another 20 to 30 people when he opens a brewery and brewpub in Bloomfield). But they can hire more staff only if their companies survive the competition.

Which, of course, requires operating lean.