Creative Class

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.

Despite the recent The Economist magazine proclamation of pending equality in the workplace, evidence suggests that the situation is more complex.

Commentators on my recent post here at Creative Class raised several good points:

Alan Says:  Start celebrating when women earn 50% of total salaries – I expect the champagne will remain on ice for a long time/ probably forever.  Sorry of this seems pessimistic.

Jana Says:   There’s a big difference between women being 50% of the workforce and women being equally represented in the workforce. My guess is that the majority of the women in the study are in lower level positions than the men. An example being that in one company I worked for was that the majority of the accounting department was female, but these were people inputting invoices, doing reconciliations and payroll. The counterpart was that the head of the department was male.

Without a better look at the statistics I’m not sure if this is something to celebrate.

The folks at Economix blog also weighed in:

Furthermore, the Current Population Survey data show that women are more than twice as likely as men to work part time (24.6 percent in 2008 compared with 11.1 percent in 2008). A measure of equal participation in paid employment should take that difference in hours into account.

The Economist notes that women remain underrepresented in management positions but registers considerable optimism concerning current trends.

By contrast, recent research by the sociologists Philip Cohen, Matt Huffman and Stefanie Knauer showed that women’s entry into management positions in the United States slowed significantly in the 1990s.

The consensus seems to be that The Economist jumped the gun in declaring a female victory.

In light of this discussion, it’s worth re-examining and considering Penelope Trunk’s long-held belief that women — along with younger generations invading the workforce — have changed the entire workplace game. I agree with Trunk that for many women and men, the new career (or should I say life) goal isn’t to maximize salary but instead to maximize life experiences, including those of raising children, spending time with friends and family, and generally enjoying the rich offerings life gives.

From a 2005  Penelope Trunk blog post:

Forget the glass ceiling because it’s about to become irrelevant. Not because women are finally going to get to the top of Fortune 500 companies in forces of more than two companies at a time. That may happen, but no one’s holding their breath. The glass ceiling is going to become irrelevant because the women who are coming into the workforce now see what’s above that glass and they are uninterested.

…. five years after earning an MBA, 40% of women are working from home. Often the press writes about this statistic like it’s a travesty, but I think it’s great. It’s an achievement that these women have decided they can find success on their own terms instead of having to fit themselves through paths that were established for men, decades ago.

The disenchantment with corporate life is not limited to women: eighty percent of men aged 20 to 39 said that a flexible job to accommodate kids takes a higher priority than doing challenging work or earning a high salary.

Many women with children — and increasingly their male partners as well — will gladly forgo career advancement, and the higher salaries that go along with it, in return for a more flexible job that allows for a better and more fulfilling family life.

Moreover, many organizations have much less hierarchical structures today. This suits the many women and men who value life experiences over corporate ladder-climbing. Working on interesting projects and with great people is a life experience they treasure — climbing a corporate ladder increasingly is not.

Your thoughts?

From The Economist, December 30, 2009:

The rich world’s quiet revolution: women are gradually taking over the workplace

At a time when the world is short of causes for celebration, here is a candidate: within the next few months women will cross the 50 percent threshold and become the majority of the American workforce. Women already make up the majority of university graduates in the OECD countries and the majority of professional workers in several rich countries, including the United States. Women run many of the world’s great companies, from PepsiCo in America to Areva in France.

Women’s economic empowerment is arguably the biggest social change of our times.

From another article in the same issue:

The rich world has seen a growing demand for women’s labor. When brute strength mattered more than brains, men had an inherent advantage. Now that brainpower has triumphed the two sexes are more evenly matched. The feminization of the workforce has been driven by the relentless rise of the service sector (where women can compete as well as men) and the equally relentless decline of manufacturing (where they could not). The landmark book in the rise of feminism was arguably not Ms Friedan’s “The Feminine Mystique” but Daniel Bell’s “The Coming of Post-Industrial Society”.

Or perhaps Rise of the Creative Class is a landmark book for demonstrating why women have increasingly found a fit in the wage-earning world.

Your thoughts?

(Thanks to colleague MW for drawing my attention to the article.)

In her September 3 blog post, “Creative Florida”, Rana Florida asked for thoughts about Florida tourism. As a resident of St. Petersburg, Florida, I thought I should respond.

Tourism has long been the golden goose in Florida but it is also a double-edged sword. We have no state income tax in large part due to the sales tax revenue that tourism provides. When the tourists come, the coffers fill and all is well. When we have downturns in the economy or other disruptions (such as hurricanes or 9/11) our budgets shrink. This volatility prevents us from having a predictable revenue stream which in turn means less long-term planning.

For better or worse, tourism also defines Florida. For many it is great to have that identity but I know a lot of creative class entrepreneurs in high-tech who lament that they can’t attract talent or VC interest because no one takes Florida seriously as a business environment.

But to me the largest impact of tourism is that it has made us lazy (I say this with love, Florida!). Tourism is easy money and we have coasted on that for too long. When the tourists just arrive with bags of money, why innovate? Why invest in our schools or our infrastructure? Why make the hard tax choices when we can raise the bed tax on hotel rooms or local tax on car rentals? We need to rethink tourism and make it a higher value experience, one that leverages the service economy and makes it more creative and innovative.

Florida had a wake-up call last year when, for the first time since WW2, we had a net outflow of population. That is a seismic shift in the underpinnings of Florida’s economy and I hope that it forces us to look at diversifying our economy and making the harder choices of developing industries beyond the beach and theme park.

Yesterday, I posted on the new Prosperity Index that ranked Finland first, Canada seventh, and the United States ninth. Last evening, my colleague Charlotta Mellander took a quick look at some factors that might be associated with a high ranking, running some simple statistical correlations. The most highly correlated factors (all with a correlation coefficient above .75): total factor productivity, human capital, the creative class, GDP per capita, and entrepreneurship. The Prosperity Index was highly correlated with the UN Human Development Index (at nearly .9) and reasonably so with a Gallup’s measure of subjective well-being or happiness (just a hair under .75).

A new report on prosperity ranks Finland first and the United States ninth. Scandinavian and North European countries dominate the top spots. Canada is seventh. The report looks at nine factors that shape prosperity – economic fundamentals, entrepreneurship and innovation, democratic Institutions. education, health, safety and security, governance, personal freedom, and social capital.

A story in this morning’s news caught me up. Social Security is apparently in trouble because more people than expected are taking early retirement, often after losing jobs and failing to find new ones. This is making demands on S.S. payouts sooner than expected and drawing down the “trust fund.”

But wait a moment, wasn’t the problem last week that boomers weren’t retiring fast enough? The next generation in line is being denied promotions because their elders aren’t quitting fast enough.

It brings to mind the old country-western song, “How can I miss you if you won’t go away?”

The first story:

Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that’s happened since the 1980s.

The deficits – $10 billion in 2010 and $9 billion in 2011 – won’t affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.

Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn’t expect the increase to be so large.

What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security.

“A lot of people who in better times would have continued working are opting to retire,” said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. “If they were younger, we would call them unemployed.”

The second story:

The financial downturn has left all sorts of casualties in its wake: more unemployment, depressed wages, and greater economic uncertainty. But I’d like to direct my angst at a different target — the baby boomers.

A hidden effect of this crisis is that, in the workplace, as in popular discourse, they simply refuse to get out of the way.

To understand my lament, you have to realize that the oldest of the baby boomers are on the cusp of retirement. For younger generations, this should be a cause for relief. For decades, Gen X-ers like myself have had to hear the standard declarations about the uniqueness of the baby boomers. Maybe they were not the Greatest Generation, but they were the ones who glorified the whole idea of generational identity. For decades, Gen X-ers have had to hear complaints about our political apathy, our popular culture, and our musical tastes.

We have suffered many of these critiques without complaint. Why? Because so many of us worked for so many of them. They were the bosses of the business world. And they were supposed to be retiring very soon, but the recession has changed all that.

In 2008, U.S. workers aged 55 to 64 who had 401(k)’s for at least 20 years saw their retirement balances drop an average of 20 percent. A recent YouGov poll showed two-thirds of this generation have not made the necessary adjustments in their financial planning. This is not a recipe for leaving the workforce anytime soon.

What does this mean for the rest of us? Younger workers who expected promotions when the boomers cleared out are going to have to stew in their own juices. With this job market, looking for a better opportunity elsewhere is not in the cards.

Leaving aside the Boomer bashing, this seems to be a contradiction. Are Boomers retiring early or not? I suspect that some of what’s happening is class based. The managerial and Creative Class 60-somethings are continuing to work because they can and often want to – their skills are relevant, they’re not caught in large layoffs and if they need to they can consult. On the other hand, working class, non college-educated boomers who are laid off aren’t finding jobs – their health care costs are high and they’re expensive to hire. So many of them who can’t find work may be taking Social Security at 62 in spite of the disadvantages (smaller checks, limits on earned income).

Does anyone have statistics on who’s retiring and who’s keeping working?

As previously discussed on this blog, in Canada this recession has pushed a number of people into self-employment. In the U.S., the trend has been less pronounced. Yet I suspect one part of the trend is happening, or soon will, in America – the move by many firms to hire “contract” employees who technically are not employees in that no deductions are taken from their pay and no extended medical or dental benefits are offered.

In Canada, some of the newly self-employed are launching new entrepreneurial start-up businesses that eventually may hire dozens of people or more. Entrepreneurship seems to be doing better in Canada than it has in a while.

But many “self-employed” persons are working on contracts in positions that were formerly salaried. A corporate recruiter recently explained the trend in the Globe and Mail:

Jeff Aplin, Calgary-based executive vice-president with David Aplin Recruiting, has also noticed a shift to more temporary work. Across Canada, he’s seen a surge of demand for contract consultants in accounting, engineering or IT to work a fixed term with a fixed task. “There’s definitely more appetite for a flexible work force” he says.

Because the 21st century economy will likely require the ability to adapt and change quickly, successful companies will likely want a certain percentage of their staff to be on fixed term contracts. Contractors may be a larger part of the future workforce.

Just because employers prefer it doesn’t mean those with talent to “sell” will want it. (And the unemployment rate in many skilled areas isn’t that high so, even in this down time, employees have some power here). Presumably, contractors receive some advantages, such as increased pay to compensate for the lower benefits.

So, for contractors, what are the advantages? What will employers need to offer in the future to have a healthy pool of contractors to choose from when they need them?

Do you primarily work on contract, doing work that others are paid on salary for?

Do you like the freedom? Or would you prefer a salaried position with set vacation allotments, benefits, etc.?

The big story last week was the census report on the fall-off in Americans’ incomes. The New York Times‘ David Leonhardt called it a “lost decade” with 2008 median household income of $50,303 falling beneath the 1998 figure of $51,295. While the national pattern is troubling, the trend in U.S. income varies widely by state.

Kevin Stolarick, research director of the Martin Prosperity Institute, compiled state-by-state statistics comparing incomes in 2007-2008 and 2005-2006.

The first map below shows the change in income for the 50 states. There were some big losers – New Jersey (-$7,214), Vermont -($5,757), Georgia (-$3,304), Delaware (-$2,558), Minnesota (-$2303), Tennessee (-$2218), Arizona (-$1,891) and Florida (-$1,890).

But there were also some big income gainers – Colorado ($4,658), North Dakota ($4,412), Oklahoma ($3,998), Alaska ($3,756), New Hampshire ($3,663), D.C. ($3,467), and Alabama ($3,405).

The second map shows the percent change in income by state.

Once again we see the patterns of winners and losers. Unlike in the nation as a whole, incomes actually increased in 29 of 50 states. Eight states saw income gains of more then five percent – Oklahoma (9.6 percent), North Dakota (9.2 percent), Alabama (8.4 percent), Colorado (8.1 percent), D.C. (6.8 percent), Alaska (6.2 percent), New Hampshire (5.7 percent), and Oregon (5.0 percent).

On the other hand, two states saw income losses of 10 percent or more – Vermont (-10.3 percent) and New Jersey (-10.1 percent); and incomes declined by more than five percent in two others – Georgia (-6.4 percent) and Tennessee (- 5.1 percent).

Business Week economist Michael Mandel has produced a terrific chart comparing college costs to the earnings of young college graduates (25- to 34-year-olds) from 1991 to 2008 (below).

While the lines track one another for most of the 1990s, they began to diverge by the late 1990s, and the gap has grown considerably over the past decade. Mandel finds that college costs in real terms are up by 23 percent since 2000, while real pay for young college grads has fallen by 11 percent.

Money quote:  “This can’t go on. It’s just not possible.”