America has a middle-class jobs problem. Over the past 30 years, jobs paying middle-class salaries have been disappearing, at least relative to the high-wage and low-wage jobs on the pay scale. 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 the jobs of the future.
12
LEAD SCHOLARS Sean D. Carr Executive Director, Batten Institute, Assistant Professor of Business Administration [email protected]Michael J. Lenox Samuel L. Slover Research Professor of Business, Academic Director and Associate Dean, Batten Institute, [email protected]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 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 e 2013–14 season of the Milstein Symposium seeks to address this critical employ- ment challenge by fostering thoughtful conversation and productive dialogue about how to create and sustain the jobs of the future. e 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. is Batten Briefing offers an overview of the issues relevant for this discussion, begin- ning 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 jobs. e second part of the Briefing explores the job-creating potential for entrepre- neurship, including a profile of today’s entrepreneurs, and concludes with potential policy levers that may motivate entrepreneurial activities to generate middle-class opportunities. BATTEN BRIEFING IMPROVING THE WORLD THROUGH ENTREPRENEURSHIP AND INNOVATION APR 2014 SPECIAL ISSUE Entrepreneurship and the Middle Class: CAN STARTUPS SAVE THE AMERICAN DREAM? 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 A Research Briefing for the Howard P. Milstein Symposium: Ideas for a New American Century ABOUT THE MILSTEIN SYMPOSIUM 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, ground- ed in history, to help rebuild the American Dream. The Miller Center will organize three Milstein commissions each year. 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.
Transcript
l e a d s c h o l a r s
Sean D. CarrExecutive Director, Batten Institute, Assistant
IN BRIEFAmerica 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 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 employ-ment 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, begin-ning 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 jobs. The second part of the Briefing explores the job-creating potential for entrepre-neurship, including a profile of today’s entrepreneurs, and concludes with potential policy levers that may motivate entrepreneurial activities to generate middle-class opportunities.
BATTEN BRIEF INGIMPROVING THE WORLD THROUGH ENTREPRENEURSHIP AND INNOVATION APR 2014
SPECIAL ISSUE
Entrepreneurship and the Middle Class: CAN STARTUPS SAVE THE AMERICAN DREAM?
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
A Research Briefing for the Howard P. Milstein Symposium: Ideas for a New American Century
ABOUT THE MILSTEIN SYMPOSIUM
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, ground-
ed in history, to help rebuild the American
Dream. The Miller Center will organize three
Milstein commissions each year.
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.
2 BATTEN BRIEFING
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, “hollowed out.” Starting in the late 1970s there has been an increasing concentration of employment in the highest- and lowest-skill occupations, while jobs in middle-skill occupations have disappeared. Consider, for example, the percentage change in employ-ment by skills group between 1980 and 2010 in the adjacent chart; we clearly see that job growth has been strongest for high-skill and low-skill workers, but relatively weak for the middle-skill group.
This hollowing-out pattern is even more ap-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 at about half that rate. However, middle-skill wage growth hovered under 10 percent, with many of these workers having no wage growth whatsoever. This bifurcation illus-trates the phenomenon of job polarization: an increasing concentration of jobs at both the high and low ends of the wage scale, with a relative reduction in middle-wage jobs.2
Recession and Recovery
Recessions are tough all around, but they tend to exacerbate the job-polarization phenom-enon, with relatively more job losses affecting middle-wage occupations during recessionary periods. For example, during the most recent downturn, 60 percent of the net job losses oc-curred in middle-wage occupations with me-dian 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-old-normal/?_r=0
JOB GROWTH (1980−2010)
GROWTH IN REAL MEDIAN WAGES (1980−2010) JOB GROWTH DURING THE RECOVERY (2010−2012)
0%
20%
40%
60%
80%
100%
0%
2%
4%
6%
0%
10%
20%
30%
40%
HIGH SKILL
UPPER-MIDDLESKILL
LOWER-MIDDLESKILL
UPPER-MIDDLESKILL
LOWER-MIDDLESKILL
LOW SKILL
HIGH SKILL
LOW SKILL
HIGH WAGE
UPPER-MIDDLEWAGE
LOWER-MIDDLE WAGE
LOW WAGE
JOB GROWTH DURING THE RECESSION (2008−2010)
0%
-2%
-4%
-6%
-8%
2%
HIGH WAGE
UPPER-MIDDLEWAGE
LOWER-MIDDLEWAGE
LOW WAGE
Stuck in the Middle: THE NEW NORMAL OF U.S. EMPLOYMENT
Source: Federal Reserve Bank of New York, using U.S. Census data.
Source: Federal Reserve Bank of New York, using U.S. Census data.
3
2008 to 2010, jobs in all wage groups suf-fered losses, but the middle-wage occupations were hit much harder and by several orders of magnitude.
Middle-class jobs also suffered during the up-turn. Middle-wage occupations accounted for less than a quarter of the net job gains during the current recovery, whereas low-wage oc-cupations with median hourly wages of $7.69 to $13.83 benefited disproportionately more, claiming roughly half of the gains.
According to a recent analysis by the Federal Reserve Bank of Atlanta, the lowest-wage sectors have consistently produced 40 to 50 percent of the job gains during recent recov-eries.4 In fact, during the current recovery period, more than 40 percent of job growth has been in the lowest-paying sectors, such as retail, leisure and hospitality, and temporary employment agencies.5
Poor growth in middle-wage jobs during the early stages of a recovery contributes to the phenomenon of the jobless recovery. This refers to those periods after recessions when rebounds in aggregate output (GDP) are accompanied by much slower recoveries in aggregate employment. After the past three recessions (1991, 2001, and 2009), aggregate 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 are being replaced at a slower rate than those at the higher and lower ends of the spectrum, resulting in further downward pressure on middle-wage jobs.4 Altig, Dave. “Myth and Reality: The Low-Wage Job Machine.” Federal Reserve Bank of Atlanta, Macroblog, August 9,
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
JOB GROWTH (1980−2010)
GROWTH IN REAL MEDIAN WAGES (1980−2010) JOB GROWTH DURING THE RECOVERY (2010−2012)
0%
20%
40%
60%
80%
100%
0%
2%
4%
6%
0%
10%
20%
30%
40%
HIGH SKILL
UPPER-MIDDLESKILL
LOWER-MIDDLESKILL
UPPER-MIDDLESKILL
LOWER-MIDDLESKILL
LOW SKILL
HIGH SKILL
LOW SKILL
HIGH WAGE
UPPER-MIDDLEWAGE
LOWER-MIDDLE WAGE
LOW WAGE
JOB GROWTH DURING THE RECESSION (2008−2010)
0%
-2%
-4%
-6%
-8%
2%
HIGH WAGE
UPPER-MIDDLEWAGE
LOWER-MIDDLEWAGE
LOW WAGE
Stuck in the Middle [ c o n t i n u e d ]
Source: Source: Oregon Office of Economic Analysis.
4 BATTEN BRIEFING
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
Tyler Cowen, professor of economics,
George Mason University
7 Cowen, Tyler. “Automation Alone Isn’t Killing Jobs.” New York Times, April 5, 2014. http://www.nytimes.com/2014/04/06/business/automation-alone-isnt-killing-jobs.html
8 Keynes, John M. “Economic Possibilities for Our Grandchildren.” In Essays in Persuasion, 358-373. New York: W.W. Norton & Company, 1963.
Brave New World: CAUSES OF THE MIDDLE-CLASS JOBS GAP
Over the past 30 years, employment has become remarkably concentrated at the 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.
The Great Decoupling
In a series of influential books and articles, MIT's Erik Brynjolfsson and Andrew McAfee have extended Keynes’s “technological unemployment” concept with a compelling argument for why today’s technologies are creating entirely new employ-ment patterns. They point to a productivity paradox, which is illustrated in the pair of charts below. They show that, starting in the mid-1970s and then accelerating in the mid-1990s, there has been a “great decoupling” of productivity (defined as gross domestic product, or GDP) and per-capita income and private employment.
50
60
70
80
90
100
110
120
130
140
1972
Real GDP per Capita
Median Income per Capita
1977
1982
1987
1992
1997
2002
2007
2012
60
80
100
120
140
160
180
200
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
1975=100
1997=100
Labor Productivity
Private Employment
LABOR PRODUCTIVITY AND PRIVATE EMPLOYMENT REAL GDP v. MEDIAN INCOME
Source: Erik Brynjolfsson and Andrew McAfee, 2014. The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies.
5
MILSTEIN SYMPOSIUM #2 Entrepreneurship and Middle-Class Job Creation, 12-13 May 2014
CO-CHAIRS
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, Hewlett-
Packard
COMMISSIONERS
Ross Baird, executive director, Village Capital
Aaron “Ronnie” Chatterji, Associate Professor,
Duke University’s Fuqua School of Business;
former Senior Economist at the White House
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
Lenny Mendonca, entrepreneur and director
emeritus, McKinsey & Company
Karen Mills, Senior Fellow, Harvard Business
School; former SBA Administrator
Warren Thompson, founder, president and
chairman, Thompson Hospitality
9 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.
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 overall productivity. But about 30 years ago all that started to change, and every year since then the gap has only grown wider. Brynjolfsson and McAfee, as well as other leading scholars, have suggested that technology, in the form of computeriza-tion, automation and other efficiency-enhancing digital technologies—coupled with the 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 been taken over by machines or outsourced to low-cost workers in other countries.
Employment losses in the middle have become gains at the high and low ends 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 demand for middle-skill and middle-wage jobs in the U.S. Inexpensive labor over-seas—some of which has been enabled by new information and communications technologies—has displaced many middle-skill, middle-wage jobs in the U.S. (e.g., customer-service call centers and on-demand manufacturing). Yet occupations that require personal contact and face-to-face interaction have been protected from the forces of globalization since these jobs cannot be easily performed remotely.
6 BATTEN BRIEFING
Revving the Engines: ARE STARTUPS JOB-GROWTH ACCELERATORS?
By some measures startups have been pro-digious job creators in this country. Ac-cording to an analysis of the U.S. Census Bureau’s Business Dynamics Statistics by the Kauffman Foundation, between 1977 and 2005 businesses less than five years old created, on average, roughly three mil-lion net new jobs each year; this compares with nearly one million net jobs destroyed each year by all other firms.11
Similarly, research from the University of Maryland and the U.S. Census Bureau found that the very newest firms (i.e., those less than one year old) have ac-counted for 20 percent of all new jobs in the U.S. So-called “young firms,” which are businesses more than one but less than five years old, may account for as much as two-thirds of all U.S. job creation, averag-ing about four new jobs per firm annu-ally.12
There is, however, rapidly emerging evi-dence that the startup job-creation engine is sputtering. Over the same 30-year period, the U.S. has been experiencing a slow but steady decline in the overall rate of new startup activity. According to a recent analysis of Census Bureau data, the number of startups as a percentage of all firms in the U.S. has dropped from about 12 percent in the 1980s to roughly 7 per-
-1M
0
20
25
30
35
40
45
50
55
60
1M
2M
3M
4M
5M
-2M
-3M
-4M
-5M
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
1977
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
1980
PERC
ENT
SHARE OF FIRMS THAT ARE YOUNG
SHARE OF JOB CREATION FROM YOUNG FIRMS
SHARE OF EMPLOYMENT FROM YOUNG FIRMS (RIGHT AXIS)
NET JOB CHANGE - STARTUPS
NET JOB CHANGE - EXISTING FIRMS
NET NEW JOBS FROM STARTUPS v. EXISTING FIRMS (1977–2005)
DECLINING SHARE OF ACTIVITY FROM YOUNG FIRMS (Firm Age Five Years or Less) U.S. Private Sector
Source: Kauffman Foundation using U.S. Census Bureau Business Dynamics Statistics
Source: Kane, Tim. 2010. “The Importance of Startups in Job Creation and Job Destruc-
tion.” Kauffman Foundation Research Series: Firm Formation and Economic Growth. Ewing
Marion Kauffman Foundation.
11 Kane, Tim. “The Importance of Startups in Job Creation and Destruction.” Kauffman Foundation research series: Firm Formation and Economic Growth, July 2010. http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2010/07/firm_formation_impor-tance_of_startups.pdf
7
NET NEW JOBS FROM STARTUPS v. EXISTING FIRMS (1977–2005)
Revving the Engines [ c o n t i n u e d ]
AVERAGE ANNUAL NET JOB CREATION
1-5 YEARS 6-10 YEARS 11+ YEARS
1-5 YEARS 6-10 YEARS 11+ YEARS
AVERAGE NET JOB CREATION BY SURVIVING COMPANIES
AVERAGE FIRM EMPLOYMENT BY FIRM AGE
High-Tech
High-Tech
ICT High-Tech
ICT High-Tech
= 1 person
Total Private
Total Private
0%
-3%
3%
6%
0%
-3%
3%
6%
9%
12%
High-Tech Total Private
ICT High-Tech
cent in 2010.13 And it’s not as though the size of these new businesses has grown either—the average startup still employs fewer than ten workers. As a result, startup job creation rates have been falling alarmingly over time.
Job creation from business startups was lower in 2009 than at any time since 1980. Throughout the 1980s workers employed by startups accounted for an average of 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, representing a 25 percent decline in job creation by startups.14 Some research sug-gests that firms established in 2009 will create one million fewer jobs during their first five to ten years, relative to historical averages.15 The Great Recession has only made things worse: between 2006 and 2009 there has been a 34 percent decline in job creation from startups, the lowest rate of job creation from new firms in three decades.16
The job creation picture is somewhat 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 information and communication tech-nology (ICT) sectors between 1990 and 2011. However, all firms more than five years old experienced net job destruc-tion. When we exclude all firms that failed from the analysis, net job creation for businesses less than ten years old is considerably improved.17
Source: Kauffman Foundation using U.S. Census Bureau
Business Dynamics Statistics and Special Tabulation
8 BATTEN BRIEFING
Revving the Engines [ c o n t i n u e d ]
1 Google 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
10 Stryker 80 1,981 10,368
1 Zappos.com 11 70% 3,003
2 Salesforce.com 27 39% 3,802
3 Rackspace Hosting 74 37% 3,027
4 Google 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
10 Chesapeake Energy 18 23 10,502
FORTUNE MAGAZINE'S TOP-GROWING COMPANIES (2011)
By Number of Employees
By Percent of Job Growth
best cos rank
best cos rank
new employees
job growth
u.s. employees
u.s. employees
SMALL/MEDIUM ENTERPRISE V. INNOVATION DRIVENRevenue, Cash Flow and Jobs over Time
REVE
NU
E /C
ASH F
LOW
/ JO
BS
TIME
innovation-driven entrepreneurship
small/medium enterpriseentrepreneurship
Source: Fortune magazine, 6 February 2013.
Number of Startups as Percentage of All Firms
IN 20107%
IN 198012%
SMALL/MEDIUM ENTERPRISE v. INNOVATION-DRIVEN: Revenue, Cash Flow and Jobs over Time
Source: Kauffman Foundation
using Business Dynamics Statistics
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.
9
42%
20% 16%
22%10 + years
27%ages 30-39
Less than a year
24%ages 40-49
19%ages 50-59
14%ages 60+
15%ages 18-29
6-10 years
1-5 years
7% 8%
28% 34% bachelor’s degree
master’s degree
professionalschool ordoctorate
high schoolgraduate or equivalent or less
technical, trade, or vocational degree or some college or associate degree
EXPERIENCE
AGE
23%
Older and Wiser: UNDERSTANDING THE AMERICAN ENTREPRENEUR
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 remains especially murky for most researchers is the degree to which ventures established by today’s entrepreneurs are resulting in the creation of middle-class jobs. We simply do not have adequate measures of whether new businesses are leading predominantly to low-, middle-, or high-wage positions.
We do, however, have data about the en-trepreneurs themselves. For instance, as the charts here illustrate, company founders tend to have more than ten years of experience before starting their businesses, and a vast 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 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-grounds. Moreover, another 22% reported being from “upper-lower-class” backgrounds led by blue-collar workers (see chart on fol-lowing page).19
NUMBER OF YEARS OF PRIOR EXPERIENCE FOUNDERS ACCUMULATED BEFORE FOUNDING A COMPANY IN 2013
HIGHEST DEGREE EARNED BY FOUNDERS STARTING A BUSINESS IN 2013
AGE DISTRIBUTION OF FOUNDERS OF NEWLY STARTED BUSINESSES IN 2013
Source for Adjacent Graphics:
Kauffman Foundation and Legal Zoom. "Who Started
New Businesses in 2013." January 2014.
10 BATTEN BRIEFING
Older and Wiser [ c o n t i n u e d ]
UPPER-UPPER CLASS: “Old money”; people who have been born into and raised with wealth; mostly consists of old “noble” or prestigious families.
LOWER-UPPER CLASS: “New money”; individuals who have become rich within their own lifetimes.
UPPER-MIDDLE CLASS: Professionals with a college education and, more often, with postgraduate degrees like MBAs, PhDs, MDs, JDs, MSs, etc.
LOWER-MIDDLE CLASS: Lower-paid white collar workers, but not manual labor-ers. Often hold associate’s or bachelor’s degrees.
UPPER-LOWER CLASS: Blue-collar workers and manual laborers. Also known as the “working class.”
LOWER-LOWER CLASS: The homeless and permanently unemployed, as well as the “working poor.”
Class definitions Definitions for socioeconomic status by Dennis Gilbert.
0%
5%
10%
15%
20%
25%
30%
35%
40%
upperUPPERCLASS
lowerUPPERCLASS
upperMIDDLECLASS
lowerMIDDLECLASS
upperLOWERCLASS
lowerLOWERCLASS
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.
SOCIOECONOMIC BACKGROUND FOR 549 FOUNDERS ACROSS MANY INDUSTRIES AND STARTUP DATES
How would you describe your family's circumstances as you grew up?
23.0%
17.9%
8.0%
9.2%
19.5%
of New Firms Say They Want to Be “Big”
of Firms Expect to Apply for a Patent, Copyright or Trademark
of Firms Surviving for 10 Years Have More Than 20 Employees
of Firms Expect to Develop Proprietary
Technology
of Firms Expect R&D Spending Will Be a Major Priority
Small Companies Tend to Stay Small
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
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 using data from the U.S. Census Bureau’s Business Dynam-ics Statistics, May 2012. http://www.census.gov/ces/pdf/BDS_StatBrief6_Young_Firms.pdf
11
14 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 and Economic Growth, April 2011. http://www.kauff-man.org/~/media/kauffman_org/research%20reports%20and%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/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.kauff-man.org/~/media/kauffman_org/research%20reports%20and%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_start-ed_new_business_in_2013.pdf
19 Wadwha, Vivek, et al. “The Anatomy of an Entrepreneur: Family Background and Motivation.” Kauffman Founda-tion, July 8, 2009. http://www.kauffman.org/~/media/kauff-man_org/research%20reports%20and%20covers/2009/07/anatomy_of_entre_071309_final.pdf
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 cre-ators 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
A study by economist Zoltan Acs in 2008 found that only 2 percent to 3 percent of all businesses can be classified as gazelles.22 However, many of these firms are the 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.
However, some gazelles, especially in the high-tech sector, have achieved phenom-enal 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).23 Facebook itself employed slightly more than 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 opportu-nities for the middle class.
12 BATTEN BRIEFING
copyr ight informat ion
BATTEN BRIEFINGS, April, 2014. Published by the
Batten Institute at the Darden School of Business,
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 energy or technology?
• Encouraging overall startup activity, thereby increasing the throughput of ven-tures by increasing the pool from which gazelles can emerge?
• Reducing failure rates by reducing barriers to survival and growth, thus increas-ing the throughput of ventures?
• Fostering the creation of more small businesses and self-employment as a pow-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?
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 Gold-hammer. Boston: Harvard University Press, 2014.
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 (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-employee-instagram-hits-83-million-vs-office-depots-23000-new-york-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-will-grow-headcount-quickly-in-2013-to-develop-future-money-making-products/
