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Plugging the Jobs Leak

A proposal for promoting new business.

By Bob Litan
The Ewing Marion Kauffman Foundation has created a “Startup Act” proposal to jump-start the ailing economy and increase job creation by accelerating the growth of startups and young businesses. The act focuses the attention of citizens and policymakers on the central role that high-growth startups must play to ensure continued strength in the U.S. economy. The benefits of startups are well established: Virtually all of the growth in U.S. jobs has been driven by the formation of firms less than five years old, and these new firms have been disproportionately responsible for commercializing the cutting-edge innovations that characterize modern life.

The act references recent Kauffman data (see below), which found that while more firms than ever have been created each year since the last recession began, the numbers of new firms with employees continues to drop—and this is a trend that
predates the recession.
The act proposes various changes in government policy:
• Welcoming immigrants capable of building high-growth
companies to the United States by providing “entrepreneurs’ visas” and green cards for those with degrees in science, technology, engineering, and math.
• Providing new firms with better access to early-stage
financing, creating capital gains tax exemptions for long-held startup investments, providing tax incentives for startup operating capital, facilitating access to public markets, and allowing shareholders of companies with market cap below $1 billion to opt-in under the Sarbanes-Oxley Act.
• Accelerating the formation and commercialization of new
ideas by creating differential patent fees to reduce the patent backlog and providing licensing freedom for academic innovators.
• Removing barriers to the formation and growth of
businesses through the introduction of automatic 10-year sunsets for all major rules, establishing common-sense and cost-effective standards for regulations, and making assessments of state and local startup and business policies.
Job creation is a nonpartisan issue, and the Startup Act aims to educate policymakers on all sides of the political spectrum about the need for comprehensive legislation aimed at helping startups.
Public discussion of the jobs shortfall has tended to focus on the Great Recession of 2007-2009, but the Kauffman research suggests that the country faces a far more fundamental employment challenge that predates the recession by many years: a long-term trend that the researchers call a slow jobs “leak.”
The study, one in a continuing series on firm formation and economic growth, found that the new businesses that continue to generate the bulk of the economy’s net job gains in recent years have been starting up with fewer workers than historic norms and are also adding fewer workers as they grow. An analysis of government data shows that since the middle of the last decade and perhaps longer, the growth path and survival rate of new businesses means they are generating fewer and fewer new jobs. The cohort of new firms that started in 2009, for example, is on course to contribute one million fewer jobs in the next decade than historical averages would suggest.
While the recession certainly deepened the jobs deficit, the U.S. economy stopped producing enough new jobs well before the downturn. Historically, startups are the key to long-term employment growth, and they have been hiring fewer people for the last several years. We won’t fix our core unemployment problem in the U.S. until young businesses get back on track.
The study draws on data sources indicating a decline in the number of new “employer businesses,” those startups that create jobs for workers other than the owner. Citing data from the U.S. Census Bureau, the study found that the number of new employer businesses has fallen 27 percent since 2006. When including new employer businesses and newly self-employed workers, the level of startups has held steady or even edged up since the recession, according to the Kauffman Index of Entrepreneurial Activity. But that encouraging sign is somewhat misleading because firms that support only the self-employed owner do not scale to generate the new jobs needed to support overall economic growth.
The study also examined the size of young companies, jobs created, and survival patterns of new firms. Historically, new U.S. firms have generated about 3 million new jobs every year, but recent cohorts have performed much worse, creating only 2.3 million jobs in 2009. At the level of individual businesses, one data series (Bureau of Labor Statistics establishment data) showed that in the 1990s new establishments opened their doors with about 7.5 jobs on average, compared to 4.9 jobs today.
The study also found that as a group, recent cohorts of new businesses have been adding jobs at a slower pace than earlier cohorts even when they do well and grow, but that growth hasn’t made up for lower employment levels at inception.
Rather than focusing on discrete events such as the opening of a new manufacturing plant or relocation of a large business to a local community, policymakers must recognize that the long-term jobs outlook will be driven by the collective decisions of young and small businesses whose changing employment patterns are hard to identify or influence. It is also important to guard against the false hope that growth in the number of self-employed workers can resolve the U.S. employment shortfall.
We need to find a way to start more employer businesses, ensure that they are larger and nurture their growth.
Robert Litan is the Kauffman Foundation’s vice president of research and policy. He is also co-author of the study, and his colleague Brink Lindsey will be a featured speaker at the HRO Today Forum in Washington, D.C., running from April 30 through May 2

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