Tag Archives: John Haltiwanger

Job creation is about young businesses, not small businesses

Building off last week’s post about disturbing labor market trends, I want to look at some additional insights from John Haltiwanger’s research regarding job creation.

We hear commonly that small business is the engine of job growth in this country.  But, if you look at the numbers closely, the reality is more complex.  As we’ve previously discussed, the American small business sector is rather small compared to other developed economies.

And, there’s no doubt that small businesses have accounted for much of the job destruction in the recent recession.  Falling incomes and declining confidence from consumers has decimated many small retailers and restaurants — as we’ve seen in spades here in Chaska.

But when you think about it, many small businesses aren’t likely to be the engines of job creation.  The number of jobs in the local dry cleaners or a particular fast-food restaurant is going to be capped at some point.

Where the growth comes from is young businesses — large and small.  This is intuitive, if you think about it, and Haltiwanger has the data to back it up.  Young businesses tend to break down into three categories over their first few years — they either fail, they grow until they reach their natural limit (think of the dry cleaners), or they grow significantly and quickly.

One real problem we’re having in the economy is that business start-ups — the number of young businesses — are at historically low levels according to analysis done by economist Jared Bernstein.  That’s perhaps not surprising given the difficulties of the current economy and the challenges many entrepreneurs are having getting access to credit.  What’s more surprising, though, is that the rate of such start-ups has been falling for quite awhile, at least back to the year 2000.

Why is that?  Everybody has their list of reasons, including:

  • lack of availability of health care for entrepreneurs reduces incentives to strike out on one’s own
  • financial resources diverted to (and then lost in) the housing bubble
  • excessive wealth concentration has reduced the pool of entrepreneurs
  • excessive wealth concentration has reduced the overall demand level in the economy
  • regulations and taxes reduce the incentives to strike out on one’s own
Regardless of what you think about the causes, this is the framework in which we need to work on the solutions.  We need a more dynamic economy, we need to encourage start-ups — and particularly those that have the potential be in that third group:  those that can grown significantly and quickly.
We should expect our policymakers to end the notion that size is what matters in terms of encouraging job creation, and focus instead on the industries and types of firms that have the potential to grow significantly and quickly.  Focus on how we can encourage people to take the risk, and focus on how we can build the support — in the private and public sectors — to help these young businesses be successful.

Disturbing labor market trends

Economist John Haltiwanger of the University of Maryland is one of the nation’s leading experts on job creation and firm dynamics.  Some graphs from his recent research (also summarized here) reveal some disturbing trends in job creation that help to explain what is going on in our labor markets.

The first chart breaks down the net change in employment into its component parts — job creation (expansion by existing companies plus new companies) and job destruction (contraction by existing companies plus firms that go out of business).

Focus on the orange line — the rate of job creation.  Since the economy started to turn towards recession in the late 1990s, the rate of job creation has never recovered to the level seen throughout the 1990s.  So the large spike in unemployment that resulted from the 2008 recession was less about job destruction (which was at similar levels to the 1990s) but more about the lack of new jobs being created.  Even today, in the slow recovery we are seeing, changes in unemployment are more the result of reduced levels of job destruction — not increased levels of job creation.

The second graph shows a figure called the unemployment escape rate — the percentage of people unemployed who find a job in the next 30 days (the blue line on the graph).

What you see on the graph tends to reflect what you would expect to see — the escape rate drops during a recession (the gray shaded areas) and then recovers fairly quickly once the recession ends.  The disturbing thing about this graph is that the escape rate is trending lower in recoveries over time.  The unemployment escape rate during the best time of the 2000s was roughly equivalent to the escape rate during the recession of the early 1980s.  That has made the drop during the most recent recession tougher to overcome.  A lower escape rate translates into more people unemployed for longer periods of time.  We already had a larger than normal number of long-term unemployed before the 2008 recession, and now we have an extremely serious problem.


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