As one looks around the economic landscape I am struck by the devastation. One number stands out above all others. One in five males between the ages of 25 and 55 is out of work! That is a staggering number. The numbers are not going back to anything “normal” anytime soon according to the IMF. Financial crises followed by recessions do not return to normal levels of employment for over a decade. Why you might ask? The answer I guess is that the levels of debt need to be worked down. Everyone owes everyone money and none pay anyone. Second, the recession destroys real capital. In this situation it was housing. It will take years to work off the excesses of the housing crisis.
So what does entrepreneurship have to do with the recession? If we take what we know today, entrepreneurs and innovation play a vital role in the economy. But can they help us in the great recession? In other words, what policy should we be pursuing to move the unemployment rate below 10 percent and back into the neighborhood of 5 percent? We know that new firms are important. They create most of the net jobs. However, only a small percent, perhaps 4 percent, create almost all of the jobs in any given four-year period. And this seems to hold up in different times, different countries, and different industries.
So how do we forge a policy? Two stories are told out there. First we know that age and size are important variables. And we know that age appears to be more important than size. In other words, we should target firms based on age not size. The two stories out there are one by Zoltan Acs and the other by Carl Schramm. In a highly influential study, Acs found that the average high impact firm was about 20 years old and came in all sizes, small, medium, and large. Schramm, on the other hand, using a Census Bureau study, found that firms less than five years old created almost all of the jobs independent of size. They both cannot be right.
However, if we are interested in short-term policy solutions and not real economic growth, we should help stimulate solo self-employed. They have a start-up rate that is three times as large as firms with employees. They start easily but also go out of business quickly. So an effective policy would be to make it easier for them to stay in business longer.
A simple policy would be to cut the self-employment tax, not over 15 percent of all new solo self-employed firms to zero for three years. If they hired any employees we should cut the employer share 7.5 percent for three years also. This would greatly increase the survival rate for these new firms. Of course this is not a long-term solution because many of these firm will contribute very little to productivity, economies of scale, or wealth creation. But they will pull down the unemployment rate.
The impact on the deficit would not be great since many of these people would not have survived to pay payroll taxes anyway. Once the economy picks up the issue of long-run growth can be addressed. But in the short run, let’s get people working.
February 2nd, 2010 at 11:02 pm
Zoltan,
Not that I am doubting your assertion, but I would be curious to know where you found the data to support the fact:
“One in five males between the ages of 25 and 55 is out of work! That is a staggering number”
Yes, indeed it is. As is the mathematical reality that for the U.S. to get back to “normalcy” of 4-5% unemployment rates, we will need a minimum of 5 consecutive years of >5% GDP growth.
Would anyone care to wager on the likelihood of that happening? The only time it has ever happened before was 1939-1943.
thanks,
Nik
February 3rd, 2010 at 2:16 am
A thought – a new employee costs at least $30,000 per year, so a $5,000 incentive is not enough to motivate a new hire. But it is a nice bonus if you were going to hire someone anyway. The incentive amount would need to be at least $15,000 to motivate hiring someone you didn’t immediately intend to hire. And, of course, the first people hired would be all your relatives …
February 3rd, 2010 at 12:28 pm
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February 3rd, 2010 at 4:39 pm
I would like you to comment more on the level of debt and it’s impact on future economic growth.
Seems to me that we as a society have consumed about 1 1/2 years more of goods / services than we have produced. Several factors are working to reduce that burden. First, bankruptcy / foreclosures are eliminating debt at the cost to the investors – who then have that much less to either spend or invest. Second, the Fed is holding down interest rates so that savers are subsidizing the recapitalization of the banks to the tune of $250 billion a year (Financial Times article) again the income savers would otherwise spend on the products of business is substantially reduced. Third, the Federal Government is taking over responsibility for private debt without raising taxes to cover the additional cost – thus postponing but not eliminating the societal debt burden.
Bottomline, the American standard of living (as measured by consumption of goods) will decline. Politicians of neither party are willing to tell voters that the free lunch has ended.
The solution is to live within our means, work harder for lower wages so we can export enough to buy back our foreign debt, and invest in greater efficiency / more skilled workers. Frankly, many of the old ways / jobs are unlikely to come back and there is a generation that has not taken education seriously enough to be able to retool for the needed changes.
February 7th, 2010 at 3:59 pm
Crises are not usually triggered by a single source. As Dr. M. Scott Peck eloquently put it in The Road Less Traveled and Beyond, “I am astonished by the number of well-educated people who offer or seek simple-minded explanations for complicated phenomena…” This Great Recession evolved from more complicated developments than just the housing bubble and debt. Economist Barry Asmus, in his book When Riding a Dead Horse, For Heaven’s Sake… Dismount!, goes through a great historical analogy of how various inventions created havoc in the economy and in the labor market.
We are in one of those periods right now. We have moved from “snail mail” with the Post Office facing unprecedented declines in volume, to email, to texting and tweeting. We have moved from paper invoices and accounts statements to paperless, virtual statements and the paper industry is reeling. According to the New York Times (http://www.nytimes.com/2008/02/10/business/10metrics.html?pagewanted=2&_r=2), per capita paper consumption fell 6 percent between 2000 and 2005. Social media is transforming advertising and PR firms. Every aspect of business is currently under assault. And, the government sector is snowballing at the same time.
So many businesses are trying to sell old, outdated solutions to today’s problems. Today’s businesses and workers need to look at The Ten Big Questions by Akira Hirai of Cayenne Consulting http://www.caycon.com/downloads/Ten_Big_Questions.pdf. Even though it was written for startups, we should all go through this exercise of “multidimensional thinking” expounded by Dr. Peck. Only by performing this exercise will the retooling mentioned by “Fred” be successful.