Entrepreneurs and their funders are part of the problem — and the solution
At a time when everyone agrees that we need to create more and better jobs, data from by the U.S. Bureau of Labor Statistics (BLS), the primary source for information on the nation’s labor market, shows that our country is doing the opposite.
We’ve heard that robots and globalization are to blame, but there’s one other culprit that nobody is talking about: entrepreneurs.
The data tells the story. The chart below tracks the number of new business creations — with “new” being defined as any company that is less than 12-months-old during the year being tracked — for the period March 1994 to March 2015.
While it is true, as the BLS states, that the number of new business being created tends to rise and fall with business cycles and the health of the economy, the number of companies created each year between 1994 and 2015 increased by 100,000 overall, or 17%.
But look at this second chart, below, showing the number of jobs being created by those new companies.
“The number of jobs created by establishments less than 1 year old decreased from 4.1 million in 1994, to 3 million in 2015,” the BLS points out. That’s a 26% decline.
This is not a blip, but a long-term trend. In fact, the BLS writes “the number of jobs created from establishment births peaked in the late 1990s and has experienced an overall decline since then.”
There is a simple — and much overlooked — explanation for what is going on behind the data, and it is directly attributable to the kinds of companies being created today. When money is invested in high-technology companies — hardware, software, or AI-based for example — the jobs created per dollar of investment are generally quite low. So those investment dollars are not creating as many jobs as they did before these technologies existed.
Compounding that problem, many of the high-tech companies that are receiving funding today produce new products and services which in turn further automate tasks of every sort, which further reduces employment. An app that lets you shop online is great but it decreases the need for traditional retail outlets and the people who work there. Between 2001 and 2016, jobs at traditional department stores fell 46%, according to Labor Department data.
Investors want to fund these kind of companies because they are “scalable,” meaning that they can grow dramatically without having to hire a corresponding number of people. Greater revenues without a substantial greater number of people leads to higher profit margins, as a rule. And again, as a rule, the more profitable a company is, the more valuable it is.
All that makes sense from a Wall Street point of view, but what scalable really means is that a company can grow dramatically without having to hire and train the legions of workers that growth implied in a bygone era.
If you started a bicycle or a car company in the past, as sales grew, you needed to hire more and more factory workers. Or think of the one most successful — but poorly scalable — businesses, such as Wal-Mart Stores, where virtually every new store carries the same number of employees as the previous store. As sales goes up, labor costs increase in proportion.
Contrast that with a software company like Facebook, or a company that thrives on design and marketing, like Apple.
In 2006, Apple’s 17,787 employees produced total sales of $19.3 billion, or slightly better than $1 million per employee. (Some $1,085,062 to be precise.) Last year, the company’s $215.6 billion in revenues was generated by 116,000 people. That comes to $1.85 million per employee. That’s scalability. Far greater revenues were produced with disproportionately fewer workers.
Contrast Apple with a traditional company like GM, which is trying desperately to become more efficient but is finding it impossible to scale. In 2006, GM had revenues of $207 billion and 280,000 workers (both salary and hourly.) That works out to $739,285 per employee.
Ten years later, GM’s 225,000 employees produced revenues of $166 billion, or $737,777 per worker, a figure basically unchanged from a decade before.
The share price of both companies reflects what is going on. At the close of 2016, GM’s market cap was $52.7 billion, or $234,000 per employee, while Apple had a market cap of $610 billion — meaning the market valued each Apple worker at $5.2 million, or 22 times more.
Is it any wonder that a disproportionate amount of funding is going to scalable companies? In light of this data, the fact that new companies are creating less jobs, as the Bureau of Labor Statistics graphs show, while not well known, should not be surprising.
The success of technology companies and the productive gains they cause isn’t necessarily bad, in terms of our overall economy, but it does create employment gaps that if not addressed will get worse and worse.
Entrepreneurs are clearly part of the problem, but instead of stopping them, let’s consider how entrepreneurs can be a bigger part of the solution:
- Ask government to fund (or partially fund) entrepreneur-led incubators designed to solve the problem. (National strategy is not antithetical to capitalism.)
- Cut the corporate income-tax rate to 15% (instead of the 20% in Trump’s tax plan) is also a no-brainer, since it will spur investment.
- Reduce regulations that hinder innovation.
Bureaucracy and business regulations that don’t keep up with the way business is done today needs to go. I am not against regulations, per se, because I would like to eat healthy food and breathe clean air, and workers have every right to feel safe at their workplace. Most importantly, without environmental regulations, or other effective mechanisms to replace them, global warming will grow as a leading threat facing humanity. That said, there are areas where regulators have gone overboard and stifled businesses from growing and providing greater numbers of jobs.
Let’s incentivize entrepreneurs to do what only they can do. Virtually every private-sector job in North America is the result of an employer founded by one or more entrepreneurs. But we have a problem — the decline in worthwhile high-paying blue-collar and middle-class jobs — and it will only get worse unless we do something about it now.
This article was originally published on MarketWatch.
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