For most of 2013, the nation's labor markets suffered. In the first 10 months of the year, only 186,000 jobs on average were created each month. Economists generally agree that monthly job growth of at least 175,000 to 200,000 is necessary just to absorb new entrants into the labor market, with much faster job creation required to meaningfully reduce unemployment. Unfortunately, monthly averages from the first quarter of the year to the second plummeted from 210,000 to 182,000. Third quarter numbers saw a further decline to 163,000.
October was the 43rd consecutive month where more unemployed Americans left the workforce discouraged than found jobs. Four and a half years after the Great Recession, nearly 24 million working-age Americans remain jobless, are working part-time involuntarily or have left the workforce completely.
How to solve this problem? If the policy target is job creation, new business formation is the bull's-eye – that was a conclusion of John Dearie, the executive vice president at the Financial Services Forum in Washington and Courtney Geduldig, who heads Standard & Poor's Washington office, who in September published, " Where the Jobs Are: Entrepreneurship and the Soul of the American Economy".
During their research Dearie and Geduldig came across a study of Census Bureau data analyzed by scholars at the Ewing Marion Kauffman Foundation, demonstrating that virtually all net new job creation over the past three decades has come from true start-ups – new businesses less than one year old. New businesses, according to the research, create an average of three million new jobs annually, while existing businesses of any age, type or size, in aggregate, shed a net average of about one million jobs each year, as some businesses fail and as others incorporate technology and become more efficient.
Alarmingly, after decades of remarkable consistency, the number of new businesses launched each year – and the average number of new jobs created by each new firm – has declined significantly in recent years. In the year ending March of 2012, new businesses created 2.7 million new jobs, down 43 percent from the 4.7 million new jobs created by start-ups in 1999.
In other words, new businesses are America's engine of job creation, and that engine has been breaking down. According to Gedulgig:
The obvious questions for us were, why is new business formation suddenly falling off and what if anything can be done to reverse that trend? After thinking for a while about how we might find the answers, we decided that the best, most credible approach was to get out of Washington, travel the country, and meet and talk with entrepreneurs face to face.
So, she and Dearie traveled the country and met with job creators in person to find the source of the problem. They set up roundtables with entrepreneurs in 12 cities across the United States, and asked, "What's in your way?" More than 200 entrepreneurs participated – from a Web-based software company in Seattle to an industrial construction firm in Orlando, Fla.; from a developer of bioscience technologies in Boston to a distributor of glow-in-the-dark fluorescent fish in Austin, Texas.
The pair expected to hear different problems, frustrations and obstacles because the U.S. economy is incredibly diverse. The start-up scene in Cambridge, Mass. is different than the start-up scene in Columbus, Ohio or Orlando, Fla. or Austin, Texas or any of the other cities Dearie and Geduldig visited.
But astonishingly, and hugely significant from the standpoint of potential policy solutions, the problems and obstacles encountered by entrepreneurs across the country are remarkably consistent:
- "We have the jobs, but can't find enough people with the skills we need."
- "Our immigration policies don't attract and retain the world's best talent."
- "Access to start-up capital is even more difficult in the wake of the 2008 financial crisis."
- "Over-regulation is killing us."
- "Tax complexity and uncertainty is diverting far too much of our time and attention away from our new businesses."
- "There's too much economic uncertainty – and it's Washington's fault."
Over the course of their summer on the road, Dearie and Geduldig learned several critical realities:
First, new businesses are extremely fragile. A third of startups fail by their second year, half by their fifth. However, new businesses that survive tend to grow and create jobs at very rapid rates.
Second, the policy needs and priorities of new businesses are unique. Start-ups are different from existing businesses. While they confront challenges similar to those of all businesses, their ability and resources to successfully navigate those challenges are much more limited.
Third, policymakers in Washington don't sufficiently understand or appreciate the unique nature, importance, vulnerability and needs of start-ups. Focused on the priorities of either large corporations or the small business community, policymakers too often overlook and neglect the economy's true engine of job creation.
Finally, policy help for America's job creators is urgently needed. Given the critical role they play in our nation's economy as the principal source of innovation, growth and job creation, the country's young businesses need and deserve a comprehensive policy framework designed to cultivate and nurture start-ups. Dearie explains,
We call that preferential policy framework an 'on-ramp to viability'. New businesses are an enormously important aspect of our economy, but they're also exceptionally fragile. We need to do a much better job of actively cultivating start-ups – providing more favorable circumstances for their formation, survival and growth.
Without that policy help, the authors argue, the nation stands little chance of creating the jobs necessary to put millions of out-of-work and underemployed Americans back to work. In their book, Dearie and Geduldig present a 30-point policy game-plan for unleashing the job-creating capacity of the entrepreneurial economy. Some highlights include:
- Cultivating new business formation, survival and growth by providing start-ups substantial tax and regulatory relief during their critical first five years
- Incentivizing badly needed workers with backgrounds in science, technology, engineering and math – or STEM – by awarding new graduates a $50,000 federal tax credit applied up to $10,000 per year during their initial five years of employment
- Launching a dialogue between business and education leaders to ensure that K-12, college and university curricula serve both the broad education needs of American students as well as the skill needs of 21st century businesses
- Attracting and retaining the world's best talent by eliminating the arbitrary and self-defeating cap on H-1B visas. Creating a "Start-Up" visa for foreign-born entrepreneurs; awarding green cards to all foreign-born graduates of American colleges and universities meeting security requirements who earn degrees in STEM fields
- Accelerating the growth of exports by negotiating trade agreements with the world's largest and fastest growing economies like India, China and Brazil.
Dearie and Geduldig say they understand that the details of their proposals can and should be debated, and that no doubt they have overlooked important issues or underestimated certain political realities. Geduldig says,
The real significance of our proposals is that they respond directly and specifically to what the nation's job creators told us they need. But from a legislative standpoint, there are any number of approaches that policymakers can take in implementing what we've proposed. We tried to be specific enough in making our recommendations to be meaningful, but not so proscriptive that we box in policymakers or come across as partisan in any way. Our proposals aren't Republican or Democratic. We're confident that our agenda for job creation can find support on both sides of the aisle.
Having tried an $800 billion fiscal stimulus and nearly five years of near-zero interest rates thanks to the Federal Reserve, policymakers in Washington need to consider a new approach. Dearie and Geduldig's research provides ideas on how to get that started, just in time for the new year.
Lisa Chau is the founder of Alpha Vert, a private consultancy focused on social media and cross-platform marketing. Previously, she worked for her alma mater, Dartmouth College, as assistant director of alumni affairs and assistant director of PR for the Tuck School of Business. She has also taught at MIT and guest lectured Baruch College and The New School.
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