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Summary:

A new report from the Hudson Institute, a conservative think tank, shows that the number of jobs created by startups has fallen sharply since 2010. Small businesses are hiring again, so what is the particular problem with startups — and why are they suffering even in a recovery?

hudson institute startup jobs 1

A new study from the conservative nonprofit think tank Hudson Institute shows a big drop in the number of jobs created by startups — defined as companies less than a year old — over the last two years. What’s going on?

“The Collapse of Startups in Job Creation” (PDF) by the Hudson Institute’s Tim Kane says startup job creation has collapsed under the Obama administration. The paper, based on the most recent data (Q4 2011) from the Bureau of Labor Statistics, says “job creation at new firms was at an all-time low in 2009 of 2.8 million, then fell again a year later by 250,000 jobs” to 2.34 million. “Quarterly figures for startup job creation have continued to weaken,” Kane writes, and “the rate of startup jobs during 2010 and 2011, years that were technically in recovery, are the lowest on record.”

Kane blames the drop on increased business regulation under a Democratic administration (though startup job creation was higher under Clinton than under George W. Bush) and cites the Affordable Care Act as “a sweeping alteration of the regulatory environment that directly changes how employers engage their workforces.”

But is there a less politicized answer to what is going on? Reuters’ Felix Salmon notes that the number of jobs created by small businesses overall has increased since 2010, so what is the particular problem with startups? It’s important to remember they’re not all in tech:

The only thing I can think of here is that for all that we think of startups as being largely high-tech things, in reality a huge number of them are in the construction industry, in one way or another. In a word, subcontractors. And no one’s starting new granite-countertop installation companies right now. But still, startups are a decent proxy for the dynamism of an economy. And these charts don’t bode at all well, on that front.

In an interview with the Huffington Post, the author’s report, Tim Kane, also blames outsourcing:

The venture capital industry expects every startup now to have an international strategy. Not just for sales, but for putting their team together. It’s just too easy for startup companies now to outsource some of their work as efficiently as they can, and if that means hiring people who aren’t Americans and whom they don’t have to pay taxes on and provide health benefits to, than we’re feeling the effects of that as a country.

The Obama administration is taking steps to address the problem. The Startup America Partnership, led by AOL cofounder Steve Case, aims to help young companies across the country grow and gain access to capital. Case is a strong proponent of the Startup Act 2.0, which builds on the JOBS Act that Congress passed in March and aims to reform immigration law for highly skilled immigrants. “By fixing a broken high-skilled immigration system and encouraging the world’s most talented innovators to contribute here in the United States,” Case wrote in the Atlantic this week, “we will once again secure our lead as the world’s most entrepreneurial economy.”

  1. Ms. Owen,
    I would emplore you to look a little deeper before you write your article next time. Did you have a look at the graph? Did you notice something peculiar about the vertical axis? It does not start at zero. Any time someone shows you a graph that doesn’t start at zero, you should stop and think about what the author is trying to sell you. In this case, the Hudson Institute is trying to sell you that the drop in startup jobs is startling. In fact, since the last year of the Bush administration to 2011, the number has dropped from about 9 to about 7.5. Not insignificant, but certainly not unexpected given the global malaise. Furthermore, did you look at the graph and reached your own conclusions, or did you simply parrot the Hudson Institute. Let’s analyse the graph again. Where did the numbers start to drop? 2011? Nope. 2010? Nope again. No change between the two numbers. The drop started in 2007 and continued until 2010, when the trend was stopped. It seems that the Affordable Care Act was responsible for the stem of loosing jobs in startups. (not really, but this would be less of a stupid argument than claiming it was responsible).
    I think a good article writer would have at least tried to find out why the drop started in 2007 and not just blindly copy verbal vomit from the Hudson Institute. Please take care next time you publish an article.

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  2. WOW, scary stuff.

    Very well presented. Thanks!

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  3. You don’t think that cheap money helps? Since the beginning of the recession in 2007, money has increasingly become tighter. And, there is a term for the credit rating of people like me, “entrepreneurial.”

    That means that people like me will pay their business bills befor their personal bills. True. That is how I functioned for a long time. My credit blows, and given that I have a job, and am doing a startup in the evenings at 1871 in Chicago, my financial situation from my last attempt should improve.

    Remember all of those people starting businesses on five credit cards? No more! And, it isn’t policies such as “care” that do it, but things like affordable healthcare. If I get into another argument on how the insurance industry failed people like us, I am going to blow. But, asking for the best healthcare plan that money could buy, and asking to be left to run a business wasn’t in these “health care” companies best interests. Oh Canada!

    My next startup is going on Kickstarter in October. This is one of the reasons for the quality in this system. Kickstarter began rather early. Why didn’t it succeed as much then?

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  4. I think the global economic crash might have a little something to do with this. Most of the people doing startups are people who can take some risk – i.e. they have money in the bank or friends/family with excess funds to invest. We’re in the toughest economic times in over half a century – totally not the economic climate that most would choose to take big risks.

    Unfortunately, I’m sure this report will get abused in the election year as proof of Obama’s unfriendly business policies.

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  5. But the chart shows a very steep decline beginning with the high point in 2006, and continuing (at a high rate) until 2009, then amuck smaller decline in 2010, then flat thru 2011.

    My question; why is the steepest decline (2006-2009) attributed to Obama policies?

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  6. Stephen Blakesley Tuesday, September 18, 2012

    @Bart,
    Hum, lets see. Is 7.8 less than 10.8 or 11.2 or maybe 11.3? Are You Better Off Today, than you were 4 years ago? Just wondering?

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  7. cynthiakocialski Tuesday, September 18, 2012

    As always, there are alot factors at play. Creation of start-jobs is directly related to the state of the economy. Venture capital funds last 10+ years, but they invest in the first 4-5 years and the remaining years are weeding out the less promising start-ups and harvesting the better ones. There are waves of investment, i.e. dot-coms, clean tech & energy, and social media. Once in the later stage of the wave, the number of start-ups declines and hence job creation until the next wave starts. According to the graph, start-up job creation declined signficantly during the dot-com bubble years of 1998-2000. In fact, it declined more than the Obama years. An interesting chart (not included) would be to compare the start-up job creation in recent years in the US to other countries. Several people track start-up funding globally and as I recall, it’s declining in other areas of the world so i suspect you would see a similar decline in start-up job creation everywhere.

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  8. Exactly, this report and it’s release timing 6 weeks before the election doesn’t smell like yesterdays tuna sandwich left on a dashboard to anyone else? Puhleese! The money from the eased regulations in the Jobs Act hasn’t even hit the market yet people! The SEC won’t have the regs out at least until Jan so it’s way too early to be calling it a failure.

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