Archive for the ‘Entrepreneur’ category

Business is Aging Faster Than the Population

August 24, 2017

The U.S. economy is in a constant state of churn. New businesses are being created while existing businesses quit or fail. This dynamic process can be disruptive as new technologies, firms, and industries replace older ones, but it is not destructive, it enables increases in productivity and spurs economic growth. In a dynamic economy with lots of churning more productive firms drive out less productive ones, new entrants disrupt incumbents, and workers are better matched with firms. A dynamic economy constantly forces labor and capital to be put to better, more productive uses. Historically the dynamism of the U.S. economy is an important ingredient that distinguished our country from many slower growth (or stagnating) industrial economies. New Hampshire and the New England region have been especially dependent on economic dynamism as the region typically loses industries to regions or nations that have lower business costs once industries mature and become more standardized. High rates of new business starts fuel dynamic economies. Unfortunately in NH and in all other states the rate of new business starts is in long-term decline.

For most of the past few decades far more businesses in NH and most states were started then either quit or failed. More recently, the gap between a large number of business starts and a smaller number of quits or failures has been narrowing. Briefly, during the great recession, more businesses quit or failed in NH and the U.S. than were started.

New Firms and Exits

Except for an uptick during the “great recession,” business quits or failures have occurred at a pretty consistent rate over the past several decades. What has narrowed the gap between the number of new firms and the number of quits and failures has been a decline in the rate of new business starts in New Hampshire and the nation. The chart below shows that new firms (less than one-year old) accounted for less than 7 percent of all New Hampshire firms in 2014, down from 15 percent in 1988. A similar decline occurred in the country as a whole.

New Firms as a % of all Firms

The decline in economic dynamism implied by lower rates of business starts is contributing to our nation’s slower (by historical standards) productivity growth. Although labor force constraints are a primary culprit, lower rates of new business starts also contribute to slower employment growth, as fewer new business replace those business that quit or fail.

A recent study by Dun & Bradstreet American Express and recent data released by the U.S. Census Bureau show that larger businesses have been creating jobs at a faster rate than small businesses (less than 20 employees) in recent years, including in NH.  A very good business reporter in NH asked for my thoughts on these findings for an article he was writing.  In the article I note that the decline in entrepreneurial activity was a more important factor explaining slower job growth among smaller firms than was business size.  The age of businesses is an “intervening” variable between the apparent relationship between size of businesses and job growth, as new business typically start small. Simply comparing the percentage of jobs added by smaller and larger firms in NH would miss the job growth implications (among the small business category) of the declining rate of new business starts. New business starts account for a significant percentage of job creation in any year and a decline in business starts hurts job growth among  the category of small (under 20 employees) businesses.   The chart below shows that new firms less than one-year old accounted for about 8 percent of all private sector jobs in NH in 1984, by 2014 that percentage was down to 3 percent, a more than 60 percent decline.  From over 30,000 jobs at startups in the mid-1980s, the number of employees at startups averaged less than 18,000 between 2012 and 2014.

Jobs and % of Jobs

Today it is impossible to enter any analysis of the economy that isn’t interpreted through some ideological lens. Making it easier for entrepreneurs to start and operate a business without excessive regulatory burdens and allowing entrepreneurs to keep more of the rewards of their risk taking may seem like an ideological prescription but it just makes sense to incent more new business formations.  However, a bigger problem may be that too often regulations, laws and the political process favor older, more established technologies, businesses, and industries and look to protect and preserve the past rather than enable future technologies and industries.

Economic cycles produce temporary declines in entrepreneurial activity.  Recessions don’t make it easy to start a business but the nation’s longer-term decline in entrepreneurial activity spans economic cycles. One of the more troubling aspects of recessions is that by reducing startups and killing-off many younger firms they shrink the pool of new business from which the next generation of growth companies could emerge.  Younger firms that survive for a number of years tend to grow faster than older firms so a smaller number of new and surviving firms impede future job growth and make it harder to recover from recessions. By impeding business starts for several years (well after the recession ended) the less visible but longer-term impact of the “great recession” will be a smaller generation of the next growth companies.

Still, structural factors in the economy are more problematic for longer-term trends in business starts.  Primary among them is demographics.  There has been a lot of attention focused (often inaccurately) on the demographics of NH’s population but not enough on the demographics of its business population, even though the two are related.  Just as declining birth rates in NH’s population is the primary factor accounting for the aging of the state’s population (not the movement of young people out of the state), a decline in the rate of new business formations is rapidly aging the population of NH businesses.  In fact, the population of NH’s businesses is aging faster than is the state’s population, potentially reducing the economic dynamism that characterized the state’s vibrant economy during much of the 1980s and 1990s.  With an increasing percentage of the state’s workforce above age 50, entrepreneurial risk taking can be expected to slow and as the chart below shows, the percentage of businesses in NH that have been in business for more than 15 years rose rapidly between 2003 and 2014 (the most recent year for which data is available).

Aging of Business

Millenials are a generation that is larger than the baby boom generation and as they become established in the working world they could reverse the trend of declining entrepreneurism.  But today individuals are changing jobs at ever lower rates, suggesting a tendency to prefer security over opportunity and risk.  Millennials are also a generation that is burdened by higher debt levels when they enter the work world, that delays or eschews homebuying, marriage and having children, will they be a generation of risk takers that revive entrepreneurism in NH and the nation?  I hope so because a dynamic, high productivity U.S. and NH economy depend on it.


Entrepreneurship and Gender Equity

January 16, 2013

I’ve written a couple of times (here and here) about gender equity issues in employment and unemployment.  I have an interest in almost all labor market issues but on this one I have three terrific and personal reasons for my interest.  One of them is a scientist in training and in a few years will be confronting the labor market issues I  examine  here.

My initial hypothesis was that larger businesses in NH would likely have more extensive policies and recruiting  efforts that would result in a higher percentage of women being employed in larger businesses in professional, scientific and technical industries in the state.  These industries include things like legal, architectural, engineering, laboratory, computer programming, accounting and scientific firms as well as veterinary services but not human medical services). As the chart below shows, that is not the case, as the smallest firms have a higher percentage of their employees who are women.   These industries also have the highest percentages of employees (male or female) with at least a BA degree.  Again, as the chart shows, smaller firms had the highest percentage of women among the employees with the highest levels of educational attainment.

Female Emp in Prof and Tech Industries

My new hypothesis is this – I don’t think (or at least I hope) that larger firms have any preference for hiring men over women.  Rather, it is that a higher percentage of the smaller firms in these industries are likely to be women owned and newer businesses started, owned, or managed by women.  I think the fact that the percentage of all women employees at larger firms, who have at least a BA degree or higher is greater than it is at smaller firms suggests that larger firms don’t just hire females predominately for lower-skilled occupations.  Women still represent a smaller percentage of graduates from many professional, scientific and technical programs (although that is changing) and thus present a smaller percentage of the potential workforce for many industries.  For smaller prof./scientific and tech. firms that are started, owned or operated by women,  female employment with the highest levels of educational attainment could, however,  be expected to be higher than at larger firms.

Anyway, that’s my story and until I get more evidence, I’m sticking to it.  More than just my interest as a parent, I think the issue has larger implications for policies to support gender equity and to increase the supply of highly skilled workers.   It may be that promoting entrepreneurship among women is among the best approaches to both.

The Recession’s Impact on The Entrepreneurial Economy

November 5, 2012

The cost of the recent recession in terms of jobs lost was great,  but the  longer-term cost could be far greater because of the impact the recession had on NH’s entrepreneurial economy.   While small businesses are cited as being responsible for the majority of new job creation, the fact always left out of that truism is that most of the job creation by small businesses come from new businesses, and more specifically, a small number of new businesses that become “gazelles,” new businesses with the potential to grow much larger.  Most small business will always be small.  They start, they fail, and with a lot of churning they are the businesses with whom we most interact on a daily basis. New Hampshire and New England increasingly have relied on our economy’s ability to generate new and innovative businesses to maintain a dynamic economy, a decline in entrepreneurial activity would have significant implications for our ability to continue to do so.

Looking at data on employment by age of businesses in NH from the past decade, it is clear that while NH may have suffered less than most states during the recent recession, it is not so clear that our entrepreneurial economy did as well.  The chart below shows that the recession had an especially large impact on NH’s entrepreneurs, as the the number of people employed at firms operating for three years or less declined by 34% between its peak in 2006, and 2011.

As a percentage of private employment, workers at firms three years old or has fallen from over nine percent of private employment to just over six percent.  This data does not mean that 16,000 workers in firms three years old or younger actually lost their jobs.  Remember, this is time series data so the firms in 2006 that were three years old or younger are not the same firms in the three year old and under category in 2011.  Certainly there were substantial job losses among young firms during the recession (as well as some gains) but the data more likely suggests that the next wave of new businesses (some of whom could be expected to become “gazelles”) simply did not start or  were not able to survive and grow.   For how long those effects lasts should be a question for anyone wondering what to do about the slow pace of job creation in the state.  It would be nice to have a control group of data from Massachusetts to examine for comparison purposes but they do not participate in the program from which these data are drawn.  Recessions always take a toll on smaller and newer businesses because those businesses are often in more precarious financial positions.  The data for NH do not go back earlier than 2003 so it is difficult to say whether this recession was different in its impacts on entrepreneurial activity in NH but we really should be concerned about whether the impact of the recession on entrepreneurial activity will have longer-term impacts on the NH economy.

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