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Slaughter & Rees Report - Entrepreneurship and Jobs

October 28, 2013 --

A comforting contrast to the unproductive mess in Washington, D.C., remains dynamism in the U.S. private sector. Silicon Valley is the vanguard for many things entrepreneurial, as described in a fascinating article in a recent issue of The New Yorker that profiles a number of Bay Area individuals who are emblematic of today’s “three-business-card life.”

People might give a lot of their time to one startup while keeping a substantial equity share, and maybe a nominal job title, in one or two others that are just getting off the ground. They might help fund-raise for one company while investing in another one. Entrepreneurialism is a high-failure business, the thinking goes, but if you keep a few pots on the burner sooner or later something will boil. Then you can live off that payoff for a while or invest it in other things.

While Silicon Valley has a rich history of creating highly-successful companies, the article showcases a new trend: starting businesses that are not designed to be the next Google, Twitter, or any of the countless other breakout companies that started in the area. “There’s been a whole flourishing of people who are starting different kinds of businesses—who are having pride in a small business that gives them autonomy,” said one local observer of the ecosystem.

Several inter-related factors are enabling this small-scale entrepreneurship. First, a weak economy has spurred people to pursue new ventures. (The area loosely defined as Silicon Valley had an unemployment rate above 9 percent from January 2009 through March 2012.) Second, world-class universities in the area generate a steady stream of ambitious, enterprising young people. Third, and perhaps most significant, today it is easier to start a business than in the past. A new law allowing crowdfunding is unlocking capital for startup businesses; just as important, new technologies (like social media) have greatly simplified the once-daunting task of launching a business.

No doubt, this wave of small-scale entrepreneurship will result in many company failures. Nothing new here: in all industries, most new enterprises fail. Companies that survive and thrive do so largely because of their innovation: their creation of new goods and services, or of new ways to deliver existing products more efficiently.

For America overall, these latest trends in entrepreneurship will hopefully lead to four critical letters: jobs. The most recent and careful academic research has documented that in recent decades, nearly all of America’s net job creation has come from young companies. This nexus between startups, jobs, and the overall health of the U.S. economy is the subject of an important new book by John Dearie and Courtney Geduldig, “Where the Jobs Are: Entrepreneurship and the Soul of the American Economy.”

Unfortunately, this dynamic past need not be prologue. Silicon Valley’s continued strength notwithstanding, America today faces an ongoing, worrisome decline in the rate of new-business startups. As documented in a recent report by the Kauffman Foundation, in the early-to-mid 1980s, each year about 12 percent to 13 percent of all U.S. firms were newly started that year. Starting in the late 1980s, however, this startup rate began to decline. This decline long predates the World Financial Crisis, but its pace has quickened recently such that today only about 7 percent of all U.S. companies are startups. Defining young firms as those aged five or less, in the early 1980s nearly 50 percent of all U.S. companies were young. Today that share is down to less than 35 percent—the lowest on record—with falls across all states.

Entrepreneurship has long meant many things:  independence, innovation, wealth. Importantly, it has also meant jobs and paychecks—in America and around the world. Policymakers should move past self-inflicted fiscal catastrophes and focus on issues like this that really matter.

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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