Anemic job growth, cautious spending, low returns and a lack of optimism about the future characterize our economy today. While the election had stimulated a healthy discussion as to what is the solution, one component stands out: our economy needs to generate more jobs. In order to keep up with population growth and immigration, we need to generate between 150,000 and 180,000 jobs each month to keep the level of employment stable. We are only generating a fraction of that, with much of this job growth taking place in low-paying and temporary sectors. Recent job reports signal modest improvements in some unemployment rates, but much of the reduction in unemployment is due to people leaving the labor force, not because new industries are hiring in large numbers. The question everyone is asking is how do we generate new jobs?
It turns out there is someone who can generate many high-paying fulfilling jobs that turn into successful careers. This someone has been around for awhile but its only recently that we have come to appreciate the role they play in job creation. Who is this person?
Enter the Entrepreneur
The Bureau of Labor Statistics recently launched a new data set called the Business Dynamics Statistics (BDS) which takes an in-depth look at job creation and destruction in the United States from 1970 through 2010. The Kauffman Foundation used this data set to better conduct a study which identified which companies are responsible for job creation. The results are rather impressive. It turns out that net job creation from 1977 through 2010 came from NEW companies regardless of size.
As the study shows, existing firms (those that are more than a year old) on a net basis are job destroyers. Existing firms hire workers, fire workers and in some cases go out of business entirely. The effect of existing firms closing their doors costs more jobs than the net hiring that takes place at existing firms that stay in business. During economic recessions, this effect is exacerbated with more existing companies closing their doors. New companies are therefore responsible for net job creation.
Armed with this data, it's clear that having a robust entrepreneurial culture can have a significant impact on the unemployment rate. The greater the number of entrepreneurs starting companies, the greater the number of people they will employ and the better off our overall economy will be. So what should we do to build an enabling environment for new company formation?
Incentives for Investors
As Congress evaluates different solutions to the looming fiscal cliff, it would be important to consider how legislation will impact investor appetite for startups. Laws that hinder the ability to make generous returns for the risk involved will be counter productive for job growth.
Motivation for Workers
Forty percent of unemployed workers have been out of work for at least six months. At this point its clear that without drastic changes, these workers will stay unemployed. Its important to help steer these people towards jobs at startups. While riskier, it presents the best prospects for finding work during periods of economic downturn.
Read more small-business Finance articles now.
Photo: Getty Images