The Collapse of Startups in Job Creation

September 21, 2012

The entrepreneurial spirit that became the engine for economic growth is weak in the status quo.  There are fewer new firms being created today than two years ago when the recession ended. In addition to the low number of startups, the number of workers hired by new firms has also decreased. At a time when growth and the addition of jobs are crucial to the economy, it is necessary to take a look at the lagging numbers, says Tim Kane, chief economist at the Hudson Institute.

  • The number of new establishments a year peaked in 2006 with 667,000.
  • That number dropped to 505,000 in 2010.
  • The number of jobs created by establishments less than one year old has decreased from 4.1 million in 1994 to 2.5 million in 2010.

The drop in the number of jobs created is especially troubling considering the importance of new firms in creating jobs. Since 1977, newly born companies were responsible for creating a net three million jobs per year, with that number dropping to 2.928 million in 2008. Kane aimed to find the long-term pattern of startup job creation per capita.

  • Between the 1980s and 1990s, there were 11 startup jobs per 1,000 people.
  • The average rate for entrepreneurial job creation under the last three presidents was 11.3, 11.2, and 10.8, respectively.
  • However, under President Obama the average rate dropped significantly to 7.8.

According to economic theory, this economy is more poised to offer better opportunities for entrepreneurs. First, there is more technology to use and explore. Second, the society is wealthier, which gives more people opportunity to use their money and explore start-ups. Finally, a shift to services requires less capital than the manufacturing or agricultural industries, making it easier for people to get their foot in the door.

But instead entrepreneurship is on the decline. There are several possible explanations for this:

  • First, high taxes and uncertainty make it a hostile environment for people that want to become entrepreneurs.
  • Second, the passage of the Affordable Care Act creates a regulatory environment that changes how employers engage their workers, thus requiring a couple years to fully understand the new changes.
  • Third, the Internal Revenue Service has begun to crackdown on employers that hire contractors instead of workers, which forces new startups to pay for benefits they can't afford.
  • Finally, the rise of occupational licensing mandated by local governments is hurting opportunities for poor and middle class Americans that want to create startups.

Source: Tim Kane, "The Collapse of Startups in Job Creation," Hudson Institute, September 2012.

 

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