Another challenge we’re facing on the jobs front is the lack of enough startups. Good research, like this, reveals their importance to job creation, especially coming out of a downturn.
Startups are like experiments growing cell cultures in a test tube—many will fail, but among the minority that succeed, some will take off and give employment growth a critical boost at times like the present. But if our lab (i.e., labor market) has too few test tubes, even if the same share were to succeed, they won’t contribute the raw numbers we need.
The figure shows job creation (it’s employment at these small businesses divided by total employment) for establishment openings at small businesses that employ 10-19 people. It’s an arbitrary size, but I looked at all the small biz start-ups and they all show the same trend. (Data nerds: this is from the very useful Business Employment Dynamics series from the BLS—openings aren’t exactly start-ups, but they’re very close (they include some seasonal businesses)).
Two points: first, openings are at historically low levels, and that’s hurting us in the sense explained above. Second, it’s a long-term trend that began in the 2000s, and if anything, has flattened in recent years.
This last point is very important because we hear a lot of nonsense about how uncertainty, taxes, regulation, yada-yada, in current policy is keeping entrepreneurs from getting in the game. So, um…how do you explain the Bush years?
What is holding back the startups? Interestingly, my favorite explanation–demand–isn’t obvious given the long, negative trend.
Fact is, we don’t know. Another way to ask the question is, “what’s holding back dynamism?”
I’ve got some hypotheses. It may be financialization—the big money to be made in the 2000s was in financial markets and feeding the financing of the housing bubble. It could be my bias, but shifting money around through the invention of exotic financial engineering doesn’t seem particularly dynamic in any lasting sense. This would help explain why the 2000s looked worse than the 1990s.
Also, excessive wealth concentration may lower the potential returns to new entrepreneurial initiatives as the winner’s circle is diminishingly small. If so, an economy like ours with such high levels of inequality could dampen dynamism. Of course, this could go the other way—if the reward to making it to the top 0.1% of the wealth scale is huge, the incentive to try is that much greater.
Finally, while demand isn’t an obvious explanation, it may be the right one. Though inequality increased in both the 1990s and the 2000s, the middle class and poor did MUCH better in the 1990s. And so, demand was much more broad-based. This meant a lot more sales not just at Nordstrom’s and Walmart (the top and bottom) but everywhere else as well, and that’s a much better climate for startups.
[Note: From the abstract of the paper linked to above: “our main finding is that once we control for firm age there is no systematic relationship between firm size and [job] growth.” So maybe our employment and tax policies should stop kissing small-business butt so much.]