BAT TEN BR IEFI N G IMPROVING THE WORLD THROUGH ENTREPRENEURSHIP AND INNOVATION
APR 2014
Entrepreneurship and the Middle Class: CAN STARTUPS SAVE THE AMERICAN DREAM?
A Research Briefing for the Howard P. Milstein Symposium: Ideas for a New American Century Presented by The Miller Center, University of Virginia, in partnership with the Batten Institute for Entrepreneurship and Innovation, University of Virginia Darden School of Business
ABOUT THE MILSTEIN SYMPOSIUM
IN BRIEF America has a middle-class jobs problem. Over the past 30 years, jobs paying middle-
class salaries—that is, occupations paying within 50 percent of median earnings—have been disappearing, at least relative to the high-wage and low-wage jobs on the pay
scale. Moreover, this trend has occurred as the median wage itself has stagnated. In the In September 2013, the University of Virginia Miller Center launched the Howard P. Milstein Symposium: Ideas for a New American Century. This five-year initiative convenes distinguished stakeholders and eminent scholars to advance innovative, non-partisan, action-oriented ideas, grounded in history, to help rebuild the American Dream. The Miller Center will organize three Milstein commissions each year.
wake of the Great Recession and after the worst decade of job growth in over 50 years, the U.S. is left with an alarming middle-class jobs gap.1
The 2013–14 season of the Milstein Symposium seeks to address this critical employment challenge by fostering thoughtful conversation and productive dialogue about how to create and sustain the jobs of the future. The next commission in this series,
which convenes 12–13 May, will focus on whether and how entrepreneurs can restart the engine of middle-class job creation.
This Batten Briefing offers an overview of the issues relevant for this discussion, beginning with a picture of middle-class employment, the effects of recession and recovery on that sector, and a summary of the causes for the “hollowing-out” of middle-class
lead scholars
Sean D. Carr Executive Director, Batten Institute, Assistant Professor of Business Administration carrs@darden.virginia.edu
Michael J. Lenox Samuel L. Slover Research Professor of Business, Academic Director and Associate Dean, Batten Institute, lenoxm@darden.virginia.edu
SPECIAL ISSUE
jobs. The second part of the Briefing explores the job-creating potential for entrepreneurship, including a profile of today’s entrepreneurs, and concludes with potential policy levers that may motivate entrepreneurial activities to generate middle-class opportunities. 1
Krueger, Alan B. “Reversing the Middle-Class Jobs Deficit.” Remarks delivered at the Center on Global Economic
Governance at Columbia University, New York, New York, April 26, 2012.
Stuck in the Middle: THE NEW NORMAL OF U.S. EMPLOYMENT JOB GROWTH (1980−2010)
Within a single generation—over the past 25 to 30 years—the U.S. labor market has been,
in the words of MIT economist David Autor,
100%
there has been an increasing concentration
80%
skill occupations, while jobs in middle-skill
60%
example, the percentage change in employ-
40%
“hollowed out.” Starting in the late 1970s
of employment in the highest- and lowest-
occupations have disappeared. Consider, for ment by skills group between 1980 and 2010
20%
growth has been strongest for high-skill and
0%
in the adjacent chart; we clearly see that job
low-skill workers, but relatively weak for the
HIGH SKILL
middle-skill group.
This hollowing-out pattern is even more ap-
UPPER - MIDDLE SKILL
LOWER - MIDDLE SKILL
LOW SKILL
Source: Federal Reserve Bank of New York, using U.S. Census data.
parent when we consider changes in median wages over the same 30-year period. High-
skill workers experienced a nearly 40 percent gain in wages, while low-skill wages grew
GROWTH IN REAL MEDIAN WAGES (1980−2010)
at about half that rate. However, middle-
skill wage growth hovered under 10 percent,
40%
growth whatsoever. This bifurcation illus-
30%
with many of these workers having no wage
trates the phenomenon of job polarization: an increasing concentration of jobs at both the high and low ends of the wage scale, with a
20%
relative reduction in middle-wage jobs.2
10%
Recession and Recovery Recessions are tough all around, but they tend
0%
to exacerbate the job-polarization phenom-
HIGH SKILL
enon, with relatively more job losses affecting
UPPER - MIDDLE SKILL
LOWER - MIDDLE SKILL
LOW SKILL
middle-wage occupations during recessionary periods. For example, during the most recent
Source: Federal Reserve Bank of New York, using U.S. Census data.
downturn, 60 percent of the net job losses occurred in middle-wage occupations with median hourly wages of $13.84 to $21.13.3 This
is reflected in the accompanying chart, which
shows that during the recessionary years from
2
Abel, Jaison R., and Richard Deitz. “Job Polarization and Rising Inequality in the Nation and the New York-Northern
New Jersey Region.” Current Issues in Economics and Finance 18 (2012): 1-7. 3
Tyson, Laura D'Andrea. “The Quality of Jobs: The New Normal and the Old Normal.” New York Times, Economix Blogs,
September 20, 2013. http://economix.blogs.nytimes.com/2013/09/20/the-quality-of-jobs-the-new-normal-and-the-oldnormal/?_r=0
2
BATTEN BRIEFING
Stuck in the Middle [ c o n t i n u e d ] JOB GROWTH DURING THE RECESSION (2008−2010)
2008 to 2010, jobs in all wage groups suf-
fered losses, but the middle-wage occupations 2% HIGH WAGE
UPPER - MIDDLE WAGE
LOWER - MIDDLE WAGE
LOW WAGE
were hit much harder and by several orders of magnitude.
0%
Middle-class jobs also suffered during the upturn. Middle-wage occupations accounted for less than a quarter of the net job gains during
-2%
the current recovery, whereas low-wage oc-
cupations with median hourly wages of $7.69 -4%
to $13.83 benefited disproportionately more, claiming roughly half of the gains.
According to a recent analysis by the Federal -6%
Reserve Bank of Atlanta, the lowest-wage
sectors have consistently produced 40 to 50 -8%
percent of the job gains during recent recoveries.4 In fact, during the current recovery
period, more than 40 percent of job growth
has been in the lowest-paying sectors, such as
JOB GROWTH DURING THE RECOVERY (2010−2012)
retail, leisure and hospitality, and temporary employment agencies.5 6%
Poor growth in middle-wage jobs during
the early stages of a recovery contributes to 4%
the phenomenon of the jobless recovery. This
refers to those periods after recessions when rebounds in aggregate output (GDP) are
2%
accompanied by much slower recoveries in
aggregate employment. After the past three
recessions (1991, 2001, and 2009), aggregate HIGH WAGE
UPPER - MIDDLE WAGE
LOWER - MIDDLE WAGE
LOW WAGE
0%
employment continued to decline for years, even after the turning point in aggregate
income and output had been reached.6 This is important since jobs in middle-wage sectors
Source: Source: Oregon Office of Economic Analysis.
are being replaced at a slower rate than those
at the higher and lower ends of the spectrum, resulting in further downward pressure on 4
Altig, Dave. “Myth and Reality: The Low-Wage Job Machine.” Federal Reserve Bank of Atlanta, Macroblog, August 9,
2013. http://macroblog.typepad.com/macroblog/2013/08/myth-and-reality-the-low-wage-job-machine.html 5
Tyson, “The Quality of Jobs.”
6
Jaimovich, Nir, and Henry E. Siu. “The Trend Is the Cycle: Job Polarization and Jobless Recoveries.” NBER Working
Paper No. 18334, August 2012. http://www.nber.org/papers/w18334
middle-wage jobs.
3
Brave New World: CAUSES OF THE MIDDLE-CLASS JOBS GAP Over the past 30 years, employment has become remarkably concentrated at the
There is reason to be skeptical of the assumption that machines will leave humanity without jobs. After all, history has seen many waves of innovation and automation, and yet as recently as 2000, the rate of unemployment was a mere 4 percent. There are unlimited human wants, so there is always more work to be done.” 7
tails of the occupational skill and wage distribution. What has caused this endur-
ing realignment of U.S. jobs? The dominant explanation among many economists is that today’s employment patterns have been reshaped by the double-helix forces of technological advances and market globalization.
Technological Unemployment In 1930 the economist John Maynard Keynes wrote an essay entitled, “Economic Possibilities for Our Grandchildren,” in which he introduced the concept of
“technological unemployment.”8 As he noted, while new technologies may enhance
productivity and maximize efficiency, they may also put people out of work, at least in the short term. Keynes emphasized that technological unemployment would be “only a temporary phase of adjustment,” and for most of the past 80 years, he was right. Over the long run, significant advances in technology have ultimately been
complements for human labor and skills, rather than substitutes. But now, at least according to some, that assertion may no longer hold true.
Tyler Cowen, professor of economics,
The Great Decoupling
George Mason University
In a series of influential books and articles, MIT's Erik Brynjolfsson and Andrew McAfee have extended Keynes’s “technological unemployment” concept with a
Cowen, Tyler. “Automation Alone Isn’t Killing Jobs.”
compelling argument for why today’s technologies are creating entirely new employ-
New York Times, April 5, 2014. http://www.nytimes.
ment patterns. They point to a productivity paradox, which is illustrated in the pair
com/2014/04/06/business/automation-alone-isnt-killingjobs.html
of charts below. They show that, starting in the mid-1970s and then accelerating in
Keynes, John M. “Economic Possibilities for Our
the mid-1990s, there has been a “great decoupling” of productivity (defined as gross
Grandchildren.” In Essays in Persuasion, 358-373. New
domestic product, or GDP) and per-capita income and private employment.
York: W.W. Norton & Company, 1963.
LABOR PRODUCTIVITY AND PRIVATE EMPLOYMENT 140
REAL GDP v. MEDIAN INCOME 200
130
180
120
140
100 Labor Productivity
120 100
2000
1995
1985
1980
60
1975
2012
2007
2002
1997
1992
1987
1982
1977
1972
50
1970
1975=100
60
Median Income per Capita
80
1965
Private Employment
70
1990
80
1960
90
1997=100
Real GDP per Capita
160
110
Source: Erik Brynjolfsson and Andrew McAfee, 2014. The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies.
4
BATTEN BRIEFING
2010
8
2005
7
Brave New World [ c o n t i n u e d ] Historically, the rate of employment and income growth more or less kept pace with
MILSTEIN SYMPOSIUM #2
year since then the gap has only grown wider. Brynjolfsson and McAfee, as well as
Entrepreneurship and Middle-Class Job Creation, 12-13 May 2014
tion, automation and other efficiency-enhancing digital technologies—coupled with
CO-CHAIRS
overall productivity. But about 30 years ago all that started to change, and every
other leading scholars, have suggested that technology, in the form of computerizathe forces of globalization—have fundamentally changed the market’s demand for middle-skill, middle-wage labor.
Computerization, Automation and Globalization Brynjolfsson and McAfee suggest that the relative decline in middle-skill and
middle-wage jobs is linked to the disappearance of occupations that rely on “rou-
tine” tasks—activities that can often be performed by following a well-defined set of procedures.9 Computerization, automation and globalization have quickly (and, in
some cases, permanently) replaced such routine-based jobs. These jobs, which do not involve manual tasks and do not need to be performed near an actual customer, have
Steve Case, chairman, Startup America Partnership; co-chair, National Advisory Council on Innovation and Entrepreneurship; founder and former CEO, AOL Carly Fiorina, president, Carly Fiorina Enterprises; former chair and CEO, HewlettPackard
COMMISSIONERS Ross Baird, executive director, Village Capital
been taken over by machines or outsourced to low-cost workers in other countries.
Aaron “Ronnie” Chatterji, Associate Professor,
Employment losses in the middle have become gains at the high and low ends
former Senior Economist at the White House
of the jobs spectrum. The diffusion of technology has created significant employ-
ment opportunities for many high-skill and high-wage workers, such as engineers, software developers and others who use technology in their work. Technology has
also increased the need for workers who can perform non-routine tasks that cannot be automated, such as retail salespeople, restaurant workers, and security guards.
Between 1980 and 2005, the share of hours worked in service occupations among
non-college workers rose by more than 50 percent. At the same time, the real hourly wages of those service workers increased, considerably surpassing wage growth in other low-skill occupations.
10
The accessibility of global labor markets has also put downward pressure on the
Duke University’s Fuqua School of Business; Council of Economic Advisers Amy Cosper, vice president and editor-in-chief, Entrepreneur magazine James Douglas, former Governor of Vermont, 2003-2011 Jacob Hacker, director of the Institution for Social and Policy Studies; Stanley B. Resor Professor of Political Science, Yale University Jen Medbery, founder, Kickboard Brian Meece, founder and CEO, RocketHub
demand for middle-skill and middle-wage jobs in the U.S. Inexpensive labor over-
Lenny Mendonca, entrepreneur and director
technologies—has displaced many middle-skill, middle-wage jobs in the U.S. (e.g.,
Karen Mills, Senior Fellow, Harvard Business
require personal contact and face-to-face interaction have been protected from the
Warren Thompson, founder, president and
seas—some of which has been enabled by new information and communications
customer-service call centers and on-demand manufacturing). Yet occupations that forces of globalization since these jobs cannot be easily performed remotely.
9
emeritus, McKinsey & Company
School; former SBA Administrator
chairman, Thompson Hospitality
Jaimovich, “The Trend Is the Cycle.”
10
Autor, David H., and David Dorn. “The Growth of Low-Skill Jobs and the Polarization of the U.S. Labor Market.”
American Economic Review 103 (2013): 1553-1597.
5
Revving the Engines: ARE STARTUPS JOB-GROWTH ACCELERATORS? By some measures startups have been pro-
NET NEW JOBS FROM STARTUPS v. EXISTING FIRMS
digious job creators in this country. Ac-
(1977–2005)
cording to an analysis of the U.S. Census
5M
Bureau’s Business Dynamics Statistics by
counted for 20 percent of all new jobs in the U.S. So-called “young firms,” which
NET JOB CHANGE
are businesses more than one but less than
NET JOB CHANGE
five years old, may account for as much as
-
2005
-5M 1977
those less than one year old) have ac-
2003
-4M
-3M
2001
found that the very newest firms (i.e.,
of Maryland and the U.S. Census Bureau
1999
-2M
1997
Similarly, research from the University
1995
-1M
1993
each year by all other firms.
1991
0
11
1989
with nearly one million net jobs destroyed
1987
1M
2M
1985
lion net new jobs each year; this compares
old created, on average, roughly three mil-
1983
3M
1981
and 2005 businesses less than five years
1979
4M
the Kauffman Foundation, between 1977
STARTUPS EXISTING FIRMS
Source: Kane, Tim. 2010. “The Importance of Startups in Job Creation and Job Destruction.” Kauffman Foundation Research Series: Firm Formation and Economic Growth. Ewing Marion Kauffman Foundation.
two-thirds of all U.S. job creation, averaging about four new jobs per firm annually.12
DECLINING SHARE OF ACTIVITY FROM YOUNG FIRMS
There is, however, rapidly emerging evi-
(Firm Age Five Years or Less) U.S. Private Sector
dence that the startup job-creation engine is sputtering. Over the same 30-year
60
period, the U.S. has been experiencing a
55
slow but steady decline in the overall rate
50
of new startup activity. According to a
45
recent analysis of Census Bureau data, the firms in the U.S. has dropped from about
12 percent in the 1980s to roughly 7 per-
40 PERCENT
number of startups as a percentage of all
35 30 25
Firm Formation and Economic Growth, July 2010. http:// www.kauffman.org/~/media/kauffman_org/research%20
SHARE OF FIRMS THAT ARE YOUNG
reports%20and%20covers/2010/07/firm_formation_impor-
SHARE OF JOB CREATION FROM YOUNG FIRMS
tance_of_startups.pdf
SHARE OF EMPLOYMENT FROM YOUNG FIRMS
( RIGHT
AXIS )
Source: Kauffman Foundation using U.S. Census Bureau Business Dynamics Statistics
6
BATTEN BRIEFING
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
and Destruction.” Kauffman Foundation research series:
1982
Kane, Tim. “The Importance of Startups in Job Creation
1980
20 11
Revving the Engines [ c o n t i n u e d ] cent in 2010.13 And it’s not as though the
AVERAGE ANNUAL NET JOB CREATION 1-5 YEARS
6-10 YEARS
11+ YEARS
size of these new businesses has grown
either—the average startup still employs fewer than ten workers. As a result,
6% High-Tech
startup job creation rates have been falling
ICT High-Tech
alarmingly over time.
3% 0%
Job creation from business startups was
Total Private
lower in 2009 than at any time since 1980.
-3%
Throughout the 1980s workers employed by startups accounted for an average of
AVERAGE NET JOB CREATION BY SURVIVING COMPANIES 12%
3.5 percent of the total U.S. job force; in the 1990s, this fell to 3.0 percent, and
in the 2000s, it dropped to 2.6 percent,
9%
representing a 25 percent decline in job
ICT High-Tech
6%
High-Tech
creation by startups.14 Some research sug-
gests that firms established in 2009 will
Total Private
3%
create one million fewer jobs during their first five to ten years, relative to historical
0%
averages.15 The Great Recession has only
-3%
made things worse: between 2006 and
2009 there has been a 34 percent decline
Source: Kauffman Foundation using U.S. Census Bureau Business Dynamics Statistics and Special Tabulation
in job creation from startups, the lowest rate of job creation from new firms in
AVERAGE FIRM EMPLOYMENT BY FIRM AGE
three decades.16
The job creation picture is somewhat
= 1 person
better when we look at certain sectors,
particularly those in high-growth areas. We see positive annual net job growth
among young firms in the high-tech and
ICT High-Tech
information and communication tech-
High-Tech
nology (ICT) sectors between 1990 and
Total Private
2011. However, all firms more than five years old experienced net job destruction. When we exclude all firms that
failed from the analysis, net job creation for businesses less than ten years old is considerably improved.17
1-5 YEARS
6-10 YEARS
11+ YEARS
7
Revving the Engines [ c o n t i n u e d ] FORTUNE MAGAZINE'S TOP-GROWING COMPANIES (2011) Source: Fortune magazine, 6 February 2013.
By Number of Employees
Number of Startups as Percentage of All Firms
12%
IN 1980
Source: Kauffman Foundation using Business Dynamics Statistics
u.s. employees
1
7,020
18,500
2
Darden Restaurants
99
5,137
169,516
3
Novo Nordisk
43
3,957
3,961
4
Marriott International
57
2,951
108,939
5
Whole Foods Market
32
2,699
60,213
6
Deloitte
67
2,630
41,125
7
Accenture
92
2,600
34,000
8
Cisco
90
2,486
34,847
9
PricewaterhouseCoopers
48
2,468
30,569
80
1,981
10,368
job growth
u.s. employees
By Percent of Job Growth
IN 2010
new employees
1
10 Stryker
7%
best cos rank
best cos rank
1
Zappos.com
11
70%
3,003
2
Salesforce.com
27
39%
3,802
3
Rackspace Hosting
74
37%
3,027
4
1
33%
18,500
5
NetApp
6
30%
6,887
6
Schweitzer Engineering Labs
97
27%
1,992
7
Meridian Health
96
27%
9,333
8
GoDaddy.com
93
25%
3,274
9
Stryker
80
24%
10,368
18
23
10,502
10 Chesapeake Energy
SMALL/MEDIUM ENTERPRISE V. INNOVATION DRIVEN SMALL/MEDIUM ENTERPRISE v. INNOVATION-DRIVEN: Revenue, Cash Flow and Jobs over Time
REVENUE
/ CASH
FLOW
/
JOBS
Revenue, Cash Flow and Jobs over Time
small/medium enterprise entrepreneurship TIME
8
innovation-driven entrepreneurship
BATTEN BRIEFING
Source: Aulet, Bill, and Fiona Murray. 2013. “A Tale of Two Entrepreneurs: Understanding Difference in the Types of Entrepreneurship in the Economy.” Ewing Marion Kauffman Foundation.
Older and Wiser: UNDERSTANDING THE AMERICAN ENTREPRENEUR NUMBER OF YEARS OF PRIOR EXPERIENCE FOUNDERS ACCUMULATED BEFORE FOUNDING A COMPANY IN 2013
The job-creating potential of startups appears somewhat mixed, although there is some
evidence that high-growth, innovation-driven enterprises may hold the most promise. What
42%
remains especially murky for most researchers
22%
10 + years
is the degree to which ventures established
1-5 years
EXPERIENCE
by today’s entrepreneurs are resulting in the
creation of middle-class jobs. We simply do
not have adequate measures of whether new
20%
businesses are leading predominantly to low-,
16%
Less than a year
middle-, or high-wage positions.
6-10 years
We do, however, have data about the en-
trepreneurs themselves. For instance, as the
charts here illustrate, company founders tend
HIGHEST DEGREE EARNED BY FOUNDERS STARTING A BUSINESS IN 2013
28%
technical, trade, or vocational degree or some college or associate degree
34%
bachelor’s degree
23%
to have more than ten years of experience
before starting their businesses, and a vast master’s degree
majority have earned at least a college degree
or higher. They are also generally between the ages of 30 and 60 years old. 18
Even though we cannot say for certain
whether new businesses generate middle-class professional school or doctorate
7%
8%
high school graduate or equivalent or less
jobs, we do know that company founders
come directly from the middle-class them-
selves. According to a Kauffman Foundation study, 72% of entrepreneurs surveyed come from self-described middle-class back-
AGE DISTRIBUTION OF FOUNDERS OF NEWLY STARTED BUSINESSES IN 2013
led by blue-collar workers (see chart on fol-
24%
ages 50-59
ages 40-49
AGE
ages 60+
being from “upper-lower-class” backgrounds lowing page).19
19%
14%
grounds. Moreover, another 22% reported
Source for Adjacent Graphics: Kauffman Foundation and Legal Zoom. "Who Started New Businesses in 2013." January 2014.
27%
15%
ages 30-39
ages 18-29
9
Older and Wiser [ c o n t i n u e d ] SOCIOECONOMIC BACKGROUND FOR 549 FOUNDERS ACROSS MANY INDUSTRIES AND STARTUP DATES
Small Companies Tend to Stay Small
How would you describe your family's circumstances as you grew up?
23.0%
40%
of New Firms Say They Want to Be “Big”
17.9%
of Firms Expect to Develop Proprietary Technology
of Firms Expect to Apply for a Patent, Copyright or Trademark
8.0%
9.2%
35% 30% 25%
19.5%
of Firms Expect R&D Spending Will Be a Major Priority
of Firms Surviving for 10 Years Have More Than 20 Employees
20% 15% 10% 5% 0%
Source: Hurst, Erik, and Benjamin Wild Pugsley. 2011. “What Do Small Businesses Do?” National Bureau of Economic Research. Working paper. Retrieved from: http://www.nber.org/ papers/w17041
upper
UPPER CLASS
lower
UPPER CLASS
upper
MIDDLE CLASS
lower
MIDDLE CLASS
upper
LOWER CLASS
lower
LOWER CLASS
Class definitions
Definitions for socioeconomic status by Dennis Gilbert. UPPER-UPPER CLASS: “Old money”;
LOWER-MIDDLE CLASS: Lower-paid white
people who have been born into and
collar workers, but not manual labor-
raised with wealth; mostly consists of
ers. Often hold associate’s or bachelor’s
old “noble” or prestigious families.
degrees.
LOWER-UPPER CLASS: “New money”;
UPPER-LOWER CLASS: Blue-collar workers
individuals who have become rich within
and manual laborers. Also known as the
their own lifetimes.
“working class.”
UPPER-MIDDLE CLASS: Professionals with
LOWER-LOWER CLASS: The homeless and
a college education and, more often, with
permanently unemployed, as well as the
using data from the U.S. Census Bureau’s Business Dynam-
postgraduate degrees like MBAs, PhDs,
“working poor.”
ics Statistics, May 2012. http://www.census.gov/ces/pdf/
MDs, JDs, MSs, etc.
12
Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda.
“Who Creates Jobs? Small vs. Large vs. Young.” NBER Working Paper No. 16300, August 2010. http://www.nber. org/papers/w16300 13
Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda.
“Business Dynamics Statistics Briefing: Where Have All the Young Firms Gone?” Kauffman Foundation reports
BDS_StatBrief6_Young_Firms.pdf
Source: The Anatomy of an Entrepreneur: Family Background and Motivation. The Kauffman Foundation. July 2009. Class definitions from Gilbert's The American Class Structure: In an Age of Growing Inequality.
10 BATTEN BRIEFING
Which Levers to Pull?
ENCOURAGING MIDDLE-CLASS JOB CREATION
If we accept that entrepreneurship can be an important creator of middle-class jobs, what levers are available to foster more entrepreneurial activity? There have been
many efforts to suggest a framework for thinking about this challenge. For example, the inaugural Jefferson Innovation Summit, hosted by the Batten Institute in 2011, generated a list of seven broad principles for sustaining a robust entrepreneurial
society, including education, finance, immigration, regulation, intellectual property,
taxation and culture. Similarly, the President’s Council on Jobs and Competitiveness proposed eight specific recommendations for encouraging high-growth enterprises, such as reforming the Small Business Administration, commercializing federally funded research and reducing student loan burdens.20
When considering whether startups can revive the American Dream, it is essential
to take into account that not all forms of entrepreneurship are equivalent as job creators for the middle class. Startups are characterized by high failure rates and high
turnover. For startups that endure, many survive only as small businesses—serving as vital creators of jobs, even though they create relatively few jobs per venture. In fact, only a relatively small number of startups become the so-called “gazelles”—high-
growth companies that demonstrate at least a doubling of revenues over a four-year period.21
Haltiwanger, John C. “Job Creation and Firm Dynam-
ics in the United States.” In Innovation Policy and the Economy, edited by Josh Lerner and Scott Stern, 17-38. Chicago: University of Chicago Press, 2012. http://www. nber.org/chapters/c12451 15
Reedy, E.J., and Robert E. Litan. “Starting Smaller;
Staying Smaller: America’s Slow Leak in Job Creation.” Kauffman Foundation research series: Firm Formation
A study by economist Zoltan Acs in 2008 found that only 2 percent to 3 percent of all businesses can be classified as gazelles. However, many of these firms are the 22
largest job creators. For example, Fortune’s 2012 listing of the top job creators in the U.S. cited Google as number one with over 7,000 new employees hired. Research
from the University of Maryland and the National Bureau of Economic Research suggests that such young, high-growth firms are also the most productive net job creators.
and Economic Growth, April 2011. http://www.kauffman.org/~/media/kauffman_org/research%20reports%20 and%20covers/2011/07/job_leaks_starting_smaller_study. pdf 16
Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda.
“Business Dynamics Statistics Briefing: Historically Large Decline in Job Creation from Startup and Existing Firms in the 2008–2009 Recession.” Kauffman Foundation reports using data from the U.S. Census Bureau’s Business Dynamics Statistics, March 2011. https://www.census.gov/
However, some gazelles, especially in the high-tech sector, have achieved phenomenal financial results with relatively limited employment. Instagram was valued at
$1 billion when acquired by Facebook while officially employing approximately 12
people (or $83 million per employee). Facebook itself employed slightly more than 23
4,500 employees in 2013 while valued close to $100 billion.24 Many of the highest
employment-growth firms fall into the retail and service sectors, raising questions
about what types of jobs are being created and whether those actually offer opportunities for the middle class.
14
ces/pdf/BDS_StatBrief5_Historical_Decline.pdf 17
Hathaway, Ian. “Tech Starts: High-Technology Busi-
ness Formation and Job Creation in the United States.” Kauffman Foundation research series: Firm Formation and Economic Growth, August, 2013. http://www.kauffman.org/~/media/kauffman_org/research%20reports%20 and%20covers/2013/08/bdstechstartsreport.pdf 18
Ewing Marion Kauffman Foundation and Legal Zoom.
“Who Started New Businesses in 2013?” January 22, 2014. http://www.kauffman.org/~/media/kauffman_org/ research%20reports%20and%20covers/2014/01/who_started_new_business_in_2013.pdf 19
Wadwha, Vivek, et al. “The Anatomy of an Entrepreneur:
Family Background and Motivation.” Kauffman Foundation, July 8, 2009. http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2009/07/ anatomy_of_entre_071309_final.pdf
11
Which Levers to Pull? [continued] 20
The Jobs Council. “Recommendations and Implementa-
tion for High-Growth Enterprises,” 2012. http://www. jobs-council.com/implementation/ 21
Birch, David G.W. “The Job Generation Process.” MIT
Program on Neighborhood and Regional Change, 302
When it comes to middle-class job creation there remains a lack of clarity on where the greatest leverage can be applied. Should we focus on: •
Identifying and fostering “gazelles”—perhaps targeting specific sectors such as
•
Encouraging overall startup activity, thereby increasing the throughput of ven-
•
Reducing failure rates by reducing barriers to survival and growth, thus increas-
•
Fostering the creation of more small businesses and self-employment as a pow-
(1979). 22
Acs, Zoltan J., and Pamela Mueller. “Employment Effects
of Business Dynamics: Mice, Gazelles and Elephants.” Small Business Economics 30 (2008): 85-100. 23
Bailey, Jeff. “Market Cap Per Employee: Instagram Hits
$83 Million vs. Office Depot’s $23,000, New York Times' $130,000.” Forbes.com, April 13, 2012. http://www.forbes. com/sites/ycharts/2012/04/13/market-cap-per-employeeinstagram-hits-83-million-vs-office-depots-23000-newyork-times-130000/2/ 24
Rao, Leena. “Facebook Will Grow Headcount Quickly
In 2013 To Develop Money-Making Products, Total Expenses Will Jump By 50 Percent.” TechCrunch, 2013. http://techcrunch.com/2013/01/30/zuck-facebook-willgrow-headcount-quickly-in-2013-to-develop-futuremoney-making-products/
energy or technology?
tures by increasing the pool from which gazelles can emerge? ing the throughput of ventures?
erful vehicle for middle-class employment?
Each of these efforts suggests a different mix of policy instruments. In a world of scarcity, how do we best allocate effort to increase entrepreneurship that leads to
the substantial creation of middle-class jobs and the revitalization of the American Dream?
Essential Reading c o p y r i g h t i n f o r m at i o n BATTEN BRIEFINGS, April, 2014. Published by the Batten Institute at the Darden School of Business, 100 Darden Boulevard, Charlottesville, VA 22903. email: batten@darden.virginia.edu www.batteninstitute.org ©2015 The Darden School Foundation. All rights reserved.
Brynjolfsson, Erik, and Andrew McAfee. The Second Machine Age: Work, Prog-
ress, and Prosperity in a Time of Brilliant Technologies. New York: W.W. Norton & Company, 2014.
Cowen, Tyler. The Great Stagnation: How America Ate All the Low-Hanging
Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. New York: Dutton, 2011.
Piketty, Thomas. Capital in the Twenty-First Century. Translated by Arthur Goldhammer. Boston: Harvard University Press, 2014.
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