My previous post, two days ago, introduced a new book by two economists, John Dearie and Courtney Geduldig, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”. They make a very strong case that net job creation comes primarily from businesses less than one year old, true “start-ups”. But, unfortunately, there has been a huge drop off in the number of new businesses created each year since 2007 and, furthermore, the historical average of seven new jobs created by a firm in its first year has now fallen to less than five.
How do we reverse this alarming trend? Here is what the authors have learned from the many entrepreneurs they have talked to:
“Not enough people with the skills we need”
“Our immigration policies are insane”
“Regulations are killing us”
“Tax payments can be the difference between survival and failure”
“There’s too much uncertainty and it’s Washington’s fault”
Although there are 24 million Americans either unemployed or underemployed, there are also 3 million advertised high skill job openings going begging and many more potential jobs available for qualified individuals. A greater emphasis on STEM (Science, Technology, Engineering and Mathematics) education in the U.S. would help. But also immigration reform is urgently needed. The Senate has passed legislation to raise the annual cap on H1-B visas (for high skilled workers) from 65,000 currently to 110,000. Hopefully the House will concur.
A Preferential Regulatory Framework for New Businesses could be devised to help fragile new businesses in their first five years. A Regulatory Improvement Commission could be created to streamline the entire federal regulatory process. Likewise a Preferential Tax Framework for New Business should be created and could, for example, recommend taxing income for the first five years at a much lower rate than normal.
Regarding policy uncertainty the authors refer to the U.S. Economic Policy Uncertainty Index which is at a very high level since the Great Recession. Economic uncertainty obviously discourages business growth.
Conclusion: A very good way to boost the economy and create more new jobs is to put greater emphasis on supporting entrepreneurs who are trying to start new businesses. There are a number of concrete actions that the federal government can take to do this and doing so should be a very high priority for our national leaders.
Two economists, John Dearie and Courtney Geduldig, have just published a very interesting new book, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”. In April 2011, Mr. Dearie and Ms. Geduldig launched an effort to understand the nature and scope of the damage to the U.S. labor markets caused by the Great Recession and, if possible, identify new ways to enhance the economy’s job-creating capacity.
They quickly “learned of research that demonstrates how virtually all net new job creation in the United States over the past 30 years has come from businesses less than a year old – true ‘start-ups.’ Investigating further, they also learned that America’s job creation machine is faltering, with the rate of start-up formation declining precipitously in recent years. To find out why, they launched an ambitious summer road trip – conducting roundtables with entrepreneurs in 12 cities across the nation.” Here is what they learned.
First of all, the U.S. labor market is tremendously dynamic, as existing businesses create new jobs and eliminate others. “In 2011, for example, 47.5 million separations occurred while 49.6 million Americans took new jobs.” But “existing firms, of any age or size, in aggregate, nearly always produce more separations than hires. … Indeed, existing businesses shed on a net basis a combined average of about 1 million jobs each year as some businesses fail, others become more efficient, and as separations simply outpace new hires. By stark contrast, new firms in their first year of existence, create an average of 3 million new jobs.”
Unfortunately, there has been a huge drop off in the number of new businesses created annually since 2007. Furthermore, the historical average of seven new jobs created by a new firm in its first year, has now fallen to less than five new jobs.
The obvious question which this discussion raises is: what policy changes are needed to boost the creation of new businesses? This will be the topic of my next post in a couple of days!