US economy is the least entrepreneurial in decades
The report, published on Monday this week by economists from the Brookings Institute, examines business dynamism in America — or how the process by which firms are continually born, fail, expand and contract — during the years 1978 through 2012.
“Research has firmly established that this dynamic process is vital to productivity and sustained economic growth,” Ian Hathaway and Robert E. Litan wrote for the think-tank, adding, “Entrepreneurs play a critical role in this process, and in net job creation.”
“But recent research shows that dynamism is slowing down,” they continued. “Business churning and new firm formations have been on a persistent decline during the last few decades, and the pace of net job creation has been subdued.”
Indeed, the economists’ research indicates that for the first time since the US Census Bureau began examining firm entry and exit rates in the US during the late 1970s, more companies are failing then being formed.
What’s more, though, is that this trend is nothing new, relatively speaking, and is evidenced across the board: according to Hathaway and Litan, business dynamism in America has been on the decline for decades, and is noticeable from coast-to-coast and in all 50 states.
Only lately, however, have business “deaths” exceeded “births,” the economists wrote, albeit only slightly. Nevertheless, neither Hathaway nor Litan are exactly sure what could be done to reverse that trend.
“Productivity growth has been fairly decent, roughly around 2 percent," Litan told The Daily Ticker this week. "But in order to really get high growth in the future ... we're going to need a lot faster rate of new firm formation and more willingness by employers and individuals to move from areas or from jobs that are not growing to areas in the economy where jobs are growing."
One way that could be accomplished, his report suggests, is to make it easier for job-hungry immigrants to enter the US to gain legal employment. Nevertheless, Litan added to the Daily Ticker that, despite extensive researcher, the economist said it’s “very puzzling” that American dynamism is on the decline.
“Perhaps the best and most immediately effective way to do this is to significantly expand the numbers of immigrant entrepreneurs granted permanent work visas to enter and remain in this country,” the report reads. “Allowing foreign graduates of US schools who concentrate in the so-called STEM fields (science, technology, engineering and math) to remain in the United States to work for other enterprises is also an imperative, especially given the historical pattern indicating that immigrants are twice as likely to launch businesses as native-born Americans.”
“That is scary,” Entrepreneur.com writer Ray Hennessey chimed in, “because we already know that there are signs that American worker is too discouraged to get a job, with the labor force participation rate at the lowest level since the Carter Administration.”
And as RT reported earlier this week, nearly 102 million working-age Americans in fact do not have work — and most of them are not even looking.
With regards to why jobs aren’t as easily obtainable, however, the Brookings economists are still looking for an answer.
“Our findings stop short of demonstrating why these trends are occurring and perhaps more importantly, what can be done about it. Doing so requires a more complete knowledge about what drives dynamism, and especially entrepreneurship, than currently exists,” the report continues. “But it is clear that these trends fit into a larger narrative of business consolidation occurring in the US economy — whatever the reason, older and larger businesses are doing better relative to younger and smaller ones. Firms and individuals appear to be more risk averse too — businesses are hanging on to cash, fewer people are launching firms and workers are less likely to switch jobs or move.”