Opinion

Felix Salmon

Job creation: Where are the startups?

By Felix Salmon
September 13, 2012

Tim Kane, at the Hudson Institute, has a new paper out with a simple title: “The Collapse of Startups in Job Creation”. His paper is basically a slightly politicized version of the charts put out by the Bureau of Labor Statistics last month, under the headline “Entrepreneurship and the U.S. Economy”. The first two charts are particularly striking. The first one looks at the number of startups in America — companies less than one year old.

bdm_chart1.png

This shows a reasonably steady rise in entrepreneurship from 1994 to 2006, then a collapse as the housing bubble bursts, and — most worryingly of all — no recovery at all after the recession ends. Instead, we have significantly fewer startups right now than we did even at the depths of the recession.

If you look at the number of jobs at these startups, rather than the number of startups, the picture is equally bad, although the decline is older. This series peaked back in 2000, and has been declining ever since:

bdm_chart2.png

This doesn’t make a lot of intuitive sense. As Kane writes,

Economic theory suggests that the modern economy offers a better environment for even more entrepreneurship. First, there is a wider technology frontier to explore. Second, a wealthier society enables more individuals to explore rather than merely work to survive. Third, the shift to services requires less startup capital than manufacturing or agriculture. In other words, the downward trend in the rate of entrepreneurship should, in theory, have rebounded by now.

Kane thinks that it’s something to do with taxes and regulations; I don’t buy it. But he also has a globalization argument:

An American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors.

Are jobs at US startups effectively being offshored? I don’t know. But I do know that small business is where the jobs are, in this economy. Here’s the chart:

fredgraph1.png

The green line, at the top, is the number of jobs at small businesses, with less than 50 employees. The red line, underneath it, is the number of jobs at medium-sized businesses, with somewhere between 50 and 500 employees. And the steadily-declining blue line, at the bottom, is the number of jobs at large businesses with more than 500 employees. Clearly, if we want to boost job creation, the best place to look is not the blue line but the green line. And equally clearly there has been an increase in the number of jobs at small firms overall, since the recession ended.

So if small firms in general are hiring again, what’s the problem with startups? Kane has run the numbers back to 1989, to come up with this chart:

startups.tiff

There’s really nothing predictable about the dismal showing in the last three years of this chart — and especially not in the last two years, when we’ve had a recovery accompanied by record-low interest rates.

Admittedly, all of these numbers are low: at their peak, startups employed only a little more than 1% of the population, and now they employ a little less than 1% of the population. Concentrating on startups is not going to move the broader employment needle very much. But the dynamic here is surprising and troubling, all the same. Intuitively, if people can’t find work for an existing company, they should be more likely, not less likely, to go out and found a new company themselves, instead. But that doesn’t seem to be happening.

The only thing I can think of here is that for all that we think of startups as being largely high-tech things, in reality a huge number of them are in the construction industry, in one way or another. In a word, subcontractors. And no one’s starting new granite-countertop installation companies right now. But still, startups are a decent proxy for the dynamism of an economy. And these charts don’t bode at all well, on that front.

Comments
24 comments so far | RSS Comments RSS

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/ ).

Posted by dmcdougall | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/ ).

Posted by dmcdougall | Report as abusive
 

“that we think of startups as being largely high-tech things”

I suspect that this kind of thinking is misguided. As someone that works in the “high-tech” industry, I would never dream of creating a startup. Intellectual property law is so absurdly messed up that I feel a pretty strong disincentive to try to create software and then profit from it. At least not without a large chunk of money to spend on legal consultation.

See Apple v. Samsung as an example. If a corporate giant like Samsung can get hit with a massive lawsuit for “Rounded square icons”, what chance do I have when a patent troll serves me with a lawsuit on some vague grounds?

Posted by spectre855 | Report as abusive
 

“that we think of startups as being largely high-tech things”

I suspect that this kind of thinking is misguided. As someone that works in the “high-tech” industry, I would never dream of creating a startup. Intellectual property law is so absurdly messed up that I feel a pretty strong disincentive to try to create software and then profit from it. At least not without a large chunk of money to spend on legal consultation.

See Apple v. Samsung as an example. If a corporate giant like Samsung can get hit with a massive lawsuit for “Rounded square icons”, what chance do I have when a patent troll serves me with a lawsuit on some vague grounds?

Posted by spectre855 | Report as abusive
 

Damn man, stop saying interest rates are low based on GOVERNMENT RATES. Private sector rates are to high and explains alot in the lack of ‘startups’.

I get a kick out of people who can’t figure it out. Literally, please, FIGURE IT OUT!!!!

Posted by Spengler | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/ ).

Posted by dmcdougall | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/.

Posted by dmcdougall | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/.

Posted by dmcdougall | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/.

Posted by dmcdougall | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/.

Posted by dmcdougall | Report as abusive
 

I wonder if Obamacare will have an impact. I know people who have had health catastrophes while trying to start businesses.

It’s been a trend among silicon valley startups to offshore from the beginning.

Overall, so much comes from abroad and it is cheap which makes certain kinds of businesses a bad bet.

Construction is down, yes.

What about Wal-mart and big retail? These must have taken market share from small retail.

Finally, consumer confidence may play a role.

Posted by nyet | Report as abusive
 

I wonder if Obamacare will have an impact. I know people who have had health catastrophes while trying to start businesses.

It’s been a trend among silicon valley startups to offshore from the beginning.

Overall, so much comes from abroad and it is cheap which makes certain kinds of businesses a bad bet.

Construction is down, yes.

What about Wal-mart and big retail? These must have taken market share from small retail.

Finally, consumer confidence may play a role.

Posted by nyet | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/.

Posted by dmcdougall | Report as abusive
 

Obviously this is only one possible factor, but what percentage of startups have traditionally been led by young people, who have yet to buy houses or build families and thus can be more tolerant of risk? It wouldn’t surprise me if this risk profile has shifted, because of the massive increase in student loan debt over the last 5-10 years (511% increase from 1999 – 2011, the vast majority since 2005: http://www.theatlantic.com/business/arch ive/2011/08/chart-of-the-day-student-loa ns-have-grown-511-since-1999/243821/.

Posted by dmcdougall | Report as abusive
 

I wonder if Obamacare will have an impact. I know people who have had health catastrophes while trying to start businesses (and were uninsured).

It’s been a trend among silicon valley startups to offshore from the beginning.

Overall, so much comes from abroad and it is cheap which makes certain kinds of businesses a bad bet.

Construction is down, yes.

What about Wal-mart and big retail? These must have taken market share from small retail.

Finally, consumer confidence may play a role.

Posted by nyet | Report as abusive
 

I wonder if Obamacare will have an impact. I know people who have had health catastrophes while trying to start businesses (and were uninsured).

It’s been a trend among silicon valley startups to offshore from the beginning.

Overall, so much comes from abroad and it is cheap which makes certain kinds of businesses a bad bet.

Construction is down, yes.

What about Wal-mart and big retail? These must have taken market share from small retail.

Finally, consumer confidence may play a role.

Posted by nyet | Report as abusive
 

I wonder if Obamacare will have an impact. I know people who have had health catastrophes while trying to start businesses (and were uninsured).

It’s been a trend among silicon valley startups to offshore from the beginning.

Overall, so much comes from abroad and it is cheap which makes certain kinds of businesses a bad bet.

Construction is down, yes.

What about Wal-mart and big retail? These must have taken market share from small retail.

Finally, consumer confidence may play a role.

Posted by nyet | Report as abusive
 

Reuters, you need to fix your commenting system. It’s ridiculously broke.

Posted by KenG_CA | Report as abusive
 

One issue may be access to capital….the banks are being very stingy right now, and it’s pretty damn hard to start a new business without at least some capital.

Posted by mfw13 | Report as abusive
 

The biggest problem with lack of start up capital has been the SEC and SarBox. Prior to SB, there were 20 real solid Tier 3 Broker Dealers that every year did 10-20 IPO’s in the $5-20mm range. These deals are the exact types this article is speaking about. It is so bad that Paulson Investments, a boutique Investment Bank of high repute, basically shut down this year. This lack of small capital formation has been, in my opinion, one of the main reasons this recession has dragged along. Small companies CANNOT get access to risk capital. That simple and that sad. And, when you hear about VC money, if your company doesn’t have a billion dollar potential forget it.

Posted by Mikeirv | Report as abusive
 

I combed over the 2004 US census some time ago and saw that there were 27 million companies in the US. Further analysis convinced me that more than more than 90% of them had 0 – 9 employees. It would be interesting to know how much these companies contribute to the overall economy in terms of job opportunities.

Based on my interviews of company leaders, and the work I do with CEOs, those who run small and medium-sized companies are currently very hesitant to make any major “bets” on the future. They are very concerned with increased regulatory activity. Taxes aside, companies of all sizes must comply (and build systems to comply with) confusing, ever-changing regulations. It is not even the passage of regulations that causes the problem; it is the possibility that the regulations will be passed, and that company leaders will have to learn about and then successfully comply with new regulations.

It is difficult to understand the negative effect that increased regulations have on businesses, unless you run one. I should note that all of the CEOs I work with (admittedly, I purposefully do not work with jerks), are solid, upstanding, honest citizens who live their lives within the law. When simply doing that becomes a major distraction, the economy is sure to suffer.

Kristin Zhivago

Posted by KristinZhivago | Report as abusive
 

Some of the surprise may be just in how the terms are framed. How many start-ups hire a lot of employees in the first year? I would ask how many jobs were created by companies formed since the recession started (2008)? My experience also has been that the construction, housing, and investment banking inudstries did badly during what is typically called the recession, but many executives didn’t lose their jobs until later, and then received unemployment benefits for a year or more, meaning they lacked the incentive you’re looking for until 2010 or 2011, which isn’t included in the data yet. I think it is still difficult to create a true start-up company without home equity to borrow against, but the framing of the data may explain the apparent conflict between the small business job creation connection and what startups there are.

Posted by unherd | Report as abusive
 

There is a complete lack of funds available. Banks won’t lend and investors seem to be only interested in extremely rapid ramp-ups with immediate returns. Until capital loosens up, the number of entrepreneurs will continue to decline.

Posted by chazbike | Report as abusive
 

In my experience the only businesses getting investments are internet startups – as long as they have a potential for high user volume. Technology and how they’re going to make money is second hand.

Posted by onmyway | Report as abusive
 

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