Saturday, November 2, 2013

Who really creates jobs anyway?


"AN APOCRYPHAL tale is told about Henry Ford II showing Walter Reuther, the veteran leader of the United Automobile Workers, around a newly automated car plant. 'Walter, how are you going to get those robots to pay your union dues,' gibed the boss of Ford Motor Company. Without skipping a beat, Reuther replied, 'Henry, how are you going to get them to buy your cars?'"
Source: Difference Engine: Luddite legacy,
The Economist Newspaper Limited, Nov 4, 2011,
© The Economist Newspaper Limited, London 2011

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Who really creates new jobs?
This is an especially important question given the nature of the changes current in the national and world economy brought about by globalization, he replacement of workers with intelligent machines, and the job-destroying effects of the economy over the past few years. 

Government?
Government affects job creation by direct hiring and or layoffs.  Since 2008, government units from largest to smallest have been shedding jobs.  Any government job creation by direct hiring is a death-knell to the career of any politician who even implies such a thing. 
Local Government Business Recruiting
Government affects local job numbers by "recruiting" existing businesses to leave one governmental unit to another, say from New York state to Texas.  This does not create jobs.

As Adam Davidson wrote in a piece in the New York Times in November, 2001, "Even with all the attention on hiring, the government’s ability to create jobs is pretty dispiriting, no matter who is in charge. The most popular types of jobs programs involve state tax breaks or subsidies that seek to seduce a company from one state to another. While this can mean good news for ‘business-friendly’ states like Texas, such policies don’t add to overall employment so much as they just shuffle jobs around."
~ Can Anyone Really Create Jobs?, By Adam Davidson, The New York Times, November 3, 2011
Government Entrepreneurial Development Programs
The government programs that most affect job creation are entrepreneurship development programs such as Small Business Development Centers and Business Incubators designed to train and counsel small business owners and shelter start-up businesses.  There are also similar private efforts in this direction.  The federal Small Business Administration falls into this category, as do the two SBA affiliated groups, the Service Corps of Retired Executives (SCORE) and the Active Corps of Executives (ACE). 

City Government
U.S. Bureau of Labor Statistics revealed that as of of August 2012 total local government employment in the U.S. had decreased by approximately 650,000 jobs from peak levels in 2008.

Big Business
It’s reported that between 2007 and 2010, the largest businesses eliminated over 3,500,000 jobs on all levels in the U.S. alone.  Why?

"No corporate leader is rewarded for hiring
people who aren’t absolutely required."
~ Can Anyone Really Create Jobs?,
By Adam Davidson, The New York Times, November 3, 2011
Mid-sized Business?
“Middle-market companies. . . between $10 million and $1 billion in sales create 34 percent of all the jobs -- a tiny slice of the U.S. economy that consists of just 200,000 companies, according to a new study from the Ohio State University Fisher College of Business and GE Capital.  . . .from 2007 to 2010, these mid-market companies added 2.2 million jobs, while big businesses cut 3.7 million jobs.”
~ Are Small Businesses Really Big Job Creators?, 
By Carol Tice, Entrepreneur Magazine, October 28, 2011
Small Business?
In sheer numbers, small businesses predominate the U.S. Economy.  While there is no agreement between economists, bureaucrats and other writers as to what constitutes  a small business, some estimate that businesses of twenty or fewer employees make up over 90% of all business in the United States.  Think your local plumber, contractor, lawn maintenance service, law firms, farmers and so on.  Money is only one motivator to most small business owners and operators, and creating a “growth business” is often not a goal.

Start-up Businesses?
For more than a decade prior to the Great Recession, the U.S. economy gave birth to about 600,000 new businesses each year. That number fell to about 400,000 in both 2009 and 2010 (the latest year for such data). And yet, there is. . .
“. . .one particular type of small business that's a big job driver is startups.”
~ Are Small Businesses Really Big Job Creators?, 
By Carol Tice, Entrepreneur Magazine, October 28, 2011

It should be pointed out that not all start-ups are going to produce jobs beyond that of a job for the business’s owner and perhaps one or two others.  Over one half of all businesses in the U.S. are full or part-time self-employed men or women.  Many self-employed make very good incomes, and once past the start-up stage of three to five years, most make a comfortable living while providing the owner with many rewards other than income.  Think free-lance writers, photographers, independent attornies, and so on.

High-Tech - Creative Class Start-ups
So much of the focus of the business media and politicians alike are start-ups by people in what economist and author Richard Florida calls the “Creative Class”.  These are entrepreneurs who start high tech or e-businesses with the hope and expectation of creating the next Facebook, Ebay or Amazon.  Many Creative Class Entrepreneurs cluster in places like California’s Silicon Valley or near to major university research institutes.  These businesses are the darling of many development professional, politician and economist’s eye because a successful creative-class start-up can yield huge benefit in new jobs and tax revenues.
According to various studies by the Kauffman Foundation, "skilled immigrants are more likely than the native-born to start new businesses that hire Americans, especially in high tech. Likewise, studies by Kauffman show that new enterprises have been for the past three decades the dominant driver of job growth and innovation."
~ My Bright Idea: Robert E. Litan on the Startup Act 2.0.
Business Week Small Business, August 23, 2012

Fringe Businesses?
First of all, what are Fringe Businesses?  I define these as enterprises selling legal and legally manufactured and obtained goods and services without benefit (or hindrance) of  government required licenses, permits and taxation.  Think street peddlers, buskers, shoe-shine stands, street performers, baby-sitters or the kid who mows your lawn.  The Fringe Economy differs from the Black Market which is made up of enterprises selling illegal or illegally obtained products and services, also without licenses, permits or paying taxes. 
  • Fringe Businesses are enterprises selling legal and legally manufactured and obtained goods and services  without government required licenses or permits while avoiding taxation wherever possible.  ~ The author
Fringe Businesses do create jobs - for the operators of the business, but rarely others.  This has been the role of Fringe Businesses as far back in history as one looks.  In pre-history, a farmer trades produce to a hunter for meat protein, and you have two businesses.  Only later do tribal elders require a cut for facilitating this trade offering a quid pro quo of protection of the traders by the tribe’s warriors.  Soon trade routes come into existence requiring road construction, bridges and more protection, paid for by those using them through what we now call taxes.

Often of necessity, people continue to trade goods and services on the Fringe of the economy.  As of 2009 the Fringe Economy of the world was estimated to create $10 trillion in trade creating over one half of the jobs worldwide.  Even in the United States with its $14 trillion dollar economy, an estimated $1 trillion dollar Fringe Economy exists outside of government regulation and taxation.

However it's not uncommon for Fringe Businesses to move into the regulated and taxed  economy, paying their fair share of the cost of running our economy . 

Think mega-business Nike, originally a Fringe Enterprise started in the trunk of an assistant coach's personal car selling a shoe whose prototype was created with his wife's waffle iron and manufactured inexpensively off shore. 

Or Weiden & Kennedy, Nike's ad agency of record and creator of the very Zen mantra "Just Do It", which at first had no offices but held daily meetings in a coffee shop in downtown Portland, Oregon.  Both businesses soon joined the regulated and taxed economy, creating jobs by the thousand as they passed through the growth stage, only to now trim jobs to boost per worker productivity and corporate profits as big businesses. 

So where do jobs come from?
Well, from the above very cursory discussion, it should be obvious that job creation comes from three categories of business activity: 

  1. Mid-sized companies in the growth phase of their existence,
  2. from start-ups, particularly Creative Class start-ups,
  3. from immigrants who are more likely to start a business and create jobs than a native-born citizen, and
  4. from people who decide to “Just Do It” and start a business as a way of creating a job for themselves and an income and future for their families.
Final thought
According to various studies by the Kauffman Foundation, "skilled immigrants are more likely than the native-born to start new businesses that hire Americans, especially in high tech. Likewise, studies by Kauffman show that new enterprises have been for the past three decades the dominant driver of job growth and innovation."
~ My Bright Idea: Robert E. Litan on the Startup Act 2.0.

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