Start-up Firms Can Balance Downsizing, Create Jobs

“The good news is that the productivity of American firms is up . . . the bad news is that we aren’t generating new jobs,” said President Clinton in Detroit Wednesday night.

“I guess you’d call it jobless prosperity,” agreed an Anaheim businessman Thursday morning, explaining that his firm has quadrupled sales and shipments over the last 10 years without adding a single employee.

What they’re talking about is the paradox of recent gains in productivity--more output per unit of input. The announcement that U.S. productivity rose 2.7% in 1992, the best showing in 20 years, means that all U.S. industry is now getting back to levels of growth and efficiency not seen since the decades immediately following World War II, which are viewed in retrospect as a golden age.

But the present doesn’t feel like a golden age. Employees are being let go, as computers increasingly do the work. Downsizing is accelerating--106,617 jobs were cut by 34 companies in just the last month, according to Bloomberg Business News.

Clinton is sure to stress job creation in his State of the Union message Wednesday night. But the question is whether Clinton understands how we and everybody else in the world will have to create jobs in this decade.

Traditional public works spending on roads and bridges may create some jobs. “But it would ignore the real challenge of unlocking new sources of job creation through technology breakthroughs or heightened entrepreneurial activity,” says economist Stephen Roach of the Morgan Stanley investment firm.

Roach is right. The very technology that seems to be eliminating jobs is what can create jobs--most often by creating new, small companies.

In the 1980s, small companies created 20 million jobs while large, Fortune 500 corporations eliminated 3.7 million jobs. And that trend continues in the ‘90s: Fortune 500 companies now employ only 10.9% of the U.S. work force of 118 million people; 10 years ago, they employed more than 20%.

The secret to job creation, therefore, is to encourage new companies. “We need access to capital, access to people and access to markets,” says Sandra Kurtzig, chairman of Ask Computer Group. She and several other entrepreneurs--many of whom backed Clinton’s election--are suggesting that he support a capital gains tax differential, greater efforts in education and a trade policy that opens foreign markets and protects patents. (Clinton in the past has advocated a tax credit for investments in new business.)

Kurtzig herself is a prime example of job-making power. A math graduate of UCLA with a master’s degree in aeronautical engineering from Stanford, Kurtzig--now 46--founded her company 20 years ago in her home. “For many years, it had 2-to-12 employees,” she says. She saw that U.S. manufacturers were still using card files to keep inventory and reckoned it could be done better with then-new minicomputers. (The personal computer hadn’t yet come along).

So she devised software to control inventory and her industrial customers kept asking her for more services and products. The result today is a $500-million sales company with 2,500 employees. And stricter inventory control, which has become common practice in U.S. companies, has made possible lower prices to customers and greater profits to producers--in short, a rise in productivity.

But you don’t have to be a math wizard to benefit from high tech. George Rathmann, the retired founder of Amgen, the Thousand Oaks-based biotech company, says rapid growth makes jobs for everybody. At Amgen, which has become a $1-billion sales company in only a decade, “we took on unskilled people in entry positions and trained them for more complex, higher-paying jobs because we needed workers,” says Rathmann. Amgen now employs 1,739 people and the ripple effect of its success among suppliers and community businesses is enormous.

Biotech also is a good example of the specialization that is breaking up big companies. The many new biotech companies being formed today would only have been research labs for pharmaceutical giants 20 years ago. But now they work independently, and faster. It took 30 years from first discoveries to develop antibiotics; it has taken biotech companies 15 years to develop their breakthroughs.

Similarly, major oil companies and electric utilities used to have in-house engineering departments, says William Hall, head of Ralph M. Parsons Co., the Pasadena-based engineering and construction firm. But now they turn for engineering--and environmental work--to specialized firms such as Parsons, Fluor, Bechtel, CRSS and Jacobs Engineering--which can do the job more economically because they serve many customers, not just one.

The need for more productive use of capital, to allow for rising living standards, is the force behind downsizing. The trend has little to do with old-fashioned labor costs, which amount to only about 5% of total costs in business today--where computerized equipment and knowledge count for so much. That’s why Mexico, despite an abundance of “cheap” labor, is determined to downsize its giant state companies.

And smaller, specialized companies create opportunity in other ways. It’s no accident that women executives head five of the specialized cable channels--Nick at Nite, USA, Discovery, American Movie Classics and Bravo--that have been taking audiences from those classic big companies, the fading TV networks. All those women once worked for the networks but found their opportunities in smaller companies--away from stifling bureaucracy.

So if we understand what’s really happening, we see that the outlook is hopeful.

But the danger is that unemployment from downsizing will grow faster than new companies can start up and create jobs.

That’s the danger Clinton will be trying to address Wednesday night if he includes special mention of the job-creating powers of new, small companies.