One reason why joblessness is so bad and so persistent

by on July 11, 2011 at 7:21 am in Economics | Permalink

There is a new Kaufmann study by E.J. Reedy and Bob Litan and it echoes some of the themes raised in TGS:

The United States appears to be suffering from a long-term leak in job creation that pre-dates the recession and has the potential to persist for an unknown time. The heart of the problem is a pullback by newly created businesses, the economy’s most critical source of job creation, which are generating substantially fewer jobs than one would expect based on past experience.

Look at Figure A in the pdf, job creation from start-ups has been falling since the 1980s.  And from the conclusion:

…the conclusions from the data analyzed here are pretty clear, and they are not heartening. Employer businesses have been starting in fewer numbers, with fewer employees, growing slower, and, therefore, generating increasingly fewer new jobs for the U.S. job market.

Read the whole thing.

Addendum: Arnold Kling comments.

1 nazgulnarsil July 11, 2011 at 7:32 am

business is becoming less labor and less capital intensive. just as only 2% of the population is now needed to farm, in 50 years only 2% of the population will be needed to manufacture goods.

of course government has its deadening effects on making employment attractive to businesses, but the effect is comparatively small to the structural shift.

2 ad*m July 11, 2011 at 11:55 am

Point well taken, but for the past century, when productivity in one sector took off, a new sector came into existence (agriculture -> manufacturing for example), thus absorbing all the (ZMP) labor previously employed.
The problem now is that no new sector is in sight, so the labor surplus from agriculture, manufacturing and now services has no new startups to go to anymore.

I am involved in a startup myself, this one trying to increase healthcare productivity. If ventures like this one become succesful, labor previously employed in healthcare will also become ZMP, adding even more to the problem.

As a startup we stay as lean as possible. We are not advertising for positions for example, which slows us down. The reason is that we want to hire generally smart people, without any racial preference. Advertising for positions may well lead to disparate impact lawsuits which would destroy us.

So there are many small reasons that in the aggregate lead to ‘startups not hiring’.

3 John Personna July 11, 2011 at 7:36 am

I think the globalization critics were more right than most will admit.

4 Becky Hargrove July 11, 2011 at 8:38 am

Plus a local and a global factor: First the local: Business which pulls up the ladder with zoning that greatly restricts the businesses that come in. Moving back to my small hometown, I could find no commercially zoned property available to set up a small barbeque stand.

As for the global, restrictions in place since the Industrial Revolution which made medical practitioners a protected class. Once the ratio of healers in communities was far greater than the present. To a degree similar restrictions apply for educators . Still, much of what people desire to learn in their communities now is no longer available locally. Contrary to what it may seem, education and health are products like any other, and they are certainly the products that so many need in the present, especially when they do not need the products of manufacture. But until the restrictions on healing and teaching are lifted, there can be no more growth in the more developed portions of the globe. It may be that people have to look beyond money for the creation of skills based wealth.

I am not a globalization critic. But globalization cannot work until wealth creation is possible from human skills.

5 Angry Voter July 11, 2011 at 8:39 am

Some states have added or increased payroll taxes.

Payroll taxes are certainly one of the most counterproductive taxes if you’re trying to increase employment.

6 Lord July 11, 2011 at 9:21 am

This is just the free lunch all economists and politicians have been eating that leisure is our ultimate goal and exporting debt is costless. Fix exchange rates and our overvalued dollar and jobs will grow.

7 Hondo69 July 11, 2011 at 12:21 pm

Kind of a no-brainer if you ask me.

All you have to do is talk to small business owners over the past 10 years. If someone would like to pay me a million dollars I’ll recount my conversations with these owners and type it up nice and neat.

8 Jeff July 11, 2011 at 11:46 pm

We’ll also need a PowerPoint presentation.

9 TallDave July 11, 2011 at 1:19 pm

Thanks for the Kling link, a very interesting argument he makes there.

It does offer some hope for the future — eventually the world will run out of new countries to add to the economy, so some time around, say, 2050, the income of average-IQ Americans should start rising again. (Yay?) In the meantime, at least global productivity is rising, which should have some nontrivially beneficial consequences.

After that, we just have to hope we don’t stumble across a vast interstellar empire of low-wage average-IQ sentients, or build them ourselves.

10 Rahul July 11, 2011 at 1:22 pm

Not specifically relevant to the US, but a lot of first world countries (e.g. Japan, Germany, Scandinavia) seem to report unemployment and falling birth rates as both grave problems. That’s ironic. Are we just giving birth to the wrong kind of people? Do we have too many people to gainfully employ or too few?

11 Tennyson July 11, 2011 at 3:25 pm

Peter Brimelow, former Executive Editor Forbes magazine & CBS MarketWatch writer comments on a recent New York Times article:
http://blog.vdare.com/archives/2011/07/10/new-york-times-asks-why-unemployed-are-invisible-vdarecom-explains/

12 KLO July 11, 2011 at 4:16 pm

One of the Econlog commentators asks the right question. If globalization means higher levels of trade among nations, lower wages — especially for low and medium skilled workers — why are there fewer start ups than there used to be and why do they employ fewer workers? It seems to me that lower wages and higher levels of trade should have led to more start ups and not less.

13 Ryan July 11, 2011 at 9:42 pm

Most startups are in tech areas which require higher skills. Startups as such aren’t really possible in low-skill (ie non-cutting-edge) areas due to strong incumbency and more established government regulation.

14 wannabe July 11, 2011 at 5:59 pm

“…in 50 years only 2% of the population will be needed to manufacture goods.”

“… problem now is that no new sector is in sight, so the labor surplus from agriculture, manufacturing and now services has no new startups to go to anymore.”

“But globalization cannot work until wealth creation is possible from human skills.”

I’m definitely not an expert, but I wonder as capital substitutes more and more for labor, what you guys think are the pros and cons of universal capital ownership proposals in addressing the economic problems suffered by unemployed labor ?

http://www.cesj.org/thirdway/graphicoverview/graphicoverview.pdf

http://www.youtube.com/watch?v=06vP84SqnS4

http://www.peoplescapitalism.org/concept.cfm

15 cdj July 11, 2011 at 8:21 pm

I read a while back about a startup owner who wanted to locate his factory in the U.S. Several venture capital firms were approached, and all made the same demand: if you locate in the U.S. we will give you no money, but if you locate in China we will gladly provide capital.

16 ad*m July 11, 2011 at 10:22 pm

I am hearing that too but
a) I specifically immigrated to the US, so that would be silly, I would have emigrated to China instead
b) there are even more stories and i have seen firsthand anecdotes about Chinese managers imply copying your manufacturing in China and once they are established undercurring you on price. There is little to no legal protection against this.

17 J Thomas July 12, 2011 at 10:14 am

I specifically immigrated to the US, so that would be silly, I would have emigrated to China instead

Did you have a typo?

“I specifically immigrated to the US, so that would be silly, I should have emigrated to China instead”

Does that fix it?

Or are there other reasons you’d prefer not to emigrate to China?

18 Eric H July 11, 2011 at 10:40 pm

1. Who is starting the startups? MBAs think that all they need is a logo and a brand, and all manufacturing can be done offshore. They wouldn’t be motivated to develop an extensive local staff.

2. Most of the comments here address what allows them to do with less. What motivates them to start and stay small? Perhaps a desire to control the business (wanting to avoid principal-agent problems) more closely? Again, who are the starters – people who have left some giant McCorp? And voluntarily, or were they let go and rehired as an “independent contractor”? How many are sole proprietorships? (mentioned on p.4 and p.16, but not explained very well)

3. Healthcare costs have been increasingly deterrent to new starters, gradually overtaking other factors?

4. Concerns over: costs of energy, obtaining finance, commercial real estate, and/or the murky political environment.

5. Cumulative changes in the regulatory environment? CPSIA and SOX, for example?

19 Ed July 11, 2011 at 11:20 pm

This piece addresses (and addresses pretty well) the exact same issue:

http://www.oftwominds.com/blogjuly11/why-smallbiz-not-hiring-6-11.html

Though I about the general point on technology. Just because the elimination of workers in agriculture enabled production to take off in other sectors in the past, doesn’t mean that it will always work this way. There are only so many hours a day that people can spend consuming goods. And what happens to trade when costs are driven so low that everything can be produced for essentially nothing?

20 Steve Roth July 13, 2011 at 6:32 pm

Reaganomics sure has been working real good, huh? Another of those early 80s inflection points, like the national debt…

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