By JEFFREY SPARSHOTT
Decadeslong slowdown in entrepreneurship underscores
transition in American labor market
Attendees work on laptop computers at the TechCrunch Disrupt San Francisco 2016 Summit, a conference for technology startups, on Sept. 12. PHOTO: DAVID PAUL MORRIS/BLOOMBERG NEWS
The U.S. economy
is inching along, productivity is flagging and millions of Americans appear
locked out of the labor market.
One key factor
intertwined with this loss of dynamism: The U.S. is creating startup businesses
at historically low rates.
The American
economy has long relied on fast-growing young companies to fuel job growth and
spread the latest innovations. As recently as the 1980s and 1990s, a small
number of young firms disproportionately contributed to U.S. employment growth,
helping allocate workers and resources to burgeoning segments of the economy.
But government data shows a decadeslong
slowdown in entrepreneurship. The share of private firms less than a year old
has dropped from more than 12% during much of the 1980s to only about 8% since
2010. In 2014, the most recent year of data, the startup rate was the
second-lowest on record, after 2010, according to Census Bureau figures
released last month, so there’s little sign of a postrecession rebound.
The share of employment at
such firms, meanwhile, has slipped from nearly 4% to about 2% of private-sector
jobs.
While only a few percentage
points, the drop translates into hundreds of thousands of companies and jobs.
If the U.S. were creating new firms at the same rate as in the 1980s, that
would be the equivalent of more than 200,000 companies and 1.8 million jobs a
year.
“The U.S. is still a robust
economy,” said John Haltiwanger, a University of Maryland economist who has
written extensively on startups. “It’s still a place that is more dynamic, more
flexible, more entrepreneurial than many economies around the world. But it’s
not what it used to be.”
The startup slowdown may have
a number of causes. Perhaps some companies need more time than backers are
willing to provide. Demographics may also explain some of the shift—baby
boomers are retiring and millennials are just entering the age bracket that is
most common for entrepreneurs.
Rules and regulations also
could be at play. Goldman Sachs economists in part blame
the cumulative effect of regulations enacted since the Great Recession for reducing
the availability of credit and raising the cost of doing business for small
firms, making them less competitive.
To be sure, the economy has
been advancing and the labor market adding jobs for years. But the pace of this
expansion has been the weakest since at least World War
II, with gross domestic product growing at a 2.1% annual rate since mid-2009.
GDP figures for the third quarter are due Friday and are expected to be only a
little better. Economists surveyed by The Wall Street Journal are forecasting a
2.5% pace.
Meanwhile, job creation has
shifted more toward incumbent firms, a development that appears interrelated
with a handful of other phenomena, including the drop-off in labor
productivity, less churn in the labor market, the dominance of fewer, bigger
companies and a geographical concentration of dynamic startups into fewer
cities.
It’s also likely one reason
the recovery from the Great Recession was so protracted—and could portend
another slow comeback from the next downturn. The White House in its latest
annual economic report highlighted the decline in startups since the 1980s.
“Young firms that survive grow faster than older, established firms,” the
report said. “Having fewer young firms thus delays recovery after recessions.”
With fewer new companies, it
also becomes harder for workers to find jobs best matched to their skills and
lowers overall productivity, the White House said.
Indeed, U.S. labor
productivity growth has been deteriorating for more than a decade. Productivity
is a key to higher living standards, allowing wage gains without spurring
inflation.
There is some disagreement on
whether tech firms have fallen into the same doldrums as other startups like
mom-and-pop shops. Mr. Haltiwanger and colleagues at the Federal Reserve and
Census Bureau find evidence they have, with significant detriment to the
economy.
“It may be that we are designing
things here in the U.S. as rapidly as ever,” Mr. Haltiwanger said. “We’re just
not producing here. That’s not good news for U.S. productivity.”
Researchers at the
Massachusetts Institute of Technology delved into state business licensing
information and found somewhat different but also discouraging results. That
is, tech entrepreneurs are generating good ideas and founding companies at a
healthy pace, but those ventures aren’t breaking out into successful big
companies.
“The system for translating good,
high-quality foundings into a growth firm, that system seems to have broken,”
said Scott Stern, an MIT professor and co-author of the study on startups.
CB Insights tracked 1,027 tech
companies that received seed funding in 2009 and 2010. By the end of 2015,
nine—fewer than 1%—reached a value of at least $1 billion, a common measure of
success. Those include Instagram, Uber and Slack.
At least for now, those
companies appear more the exception than the rule.
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