Entrepreneurship and Job Creation

Job creation is one of the most important factors in any economic recovery.  It is also the main factor that has challenged U.S. policy-makers since the 2008 Financial Crisis and resulting contraction.  A major part of the U.S. Presidential election has been about who knows how to create jobs, and how that is accomplished.  President Obama has been a proponent of the Keynesian stimulus variety.  The view that in times of economic contraction, the best thing to do is to increase government spending to make up for decreasing private investment and consumption.  Governor Romney has been a proponent of letting the private sector reinvigorate its own investment and consumption.  I wanted to find campaign ads of each candidate promoting their policies, but in the current political climate, it is much easier to find them bashing the others' ideas.

One thing that has had me concerned is the lack of entrepreneurship since the Great Recession began.  Entrepreneurship often increases during periods of low interest rates, high unemployment rates and their resulting downward shifts in nominal wages.  Why haven't we seen a flurry of small business start-ups in the United States these past few years?

Statistics of U.S. Businesses (U.S. Census Bureau)

It seems that the Statistics of U.S. Businesses survey has been discontinued by the Census and the Small Business Administration.  This is too bad because 2009 was the trough of the contraction, and I'm most interested in that statistic since then.

Business Dynamics Statistics (U.S. Census Bureau)

The Business Dynamics Statistics survey lasts until 2010, and are somewhat more tuned to this issue: firm creation and job creation.  2009 saw the greatest decrease in job creation since the survey began with a twenty percent drop.  Firm creation did not drop (year over year) as much and has since rebounded to almost 10%!  So perhaps this is evidence that the problem is not as significant as anecdotes would suggest.  Another interesting aspect of the job creation data is that this only measures private sector job creation, and clearly shows that private sector employment rebounded into positive growth by 2010.

The United States is the fourth easiest nation to do business in, as ranked by the World Bank.  There are clearly some areas in which we could do better.  The main way that we perform poorly is business taxes, where we rank 72nd.

There are many factors that go into starting a business, and paying taxes is not the biggest factor, but it is a fairly correlated one (r = 0.37).  Bigger factors include 'protecting investors,' 'getting credit,' 'trading across borders,' and 'resolving insolvency.'  The U.S. is fifth and fourth for 'protecting investors' and 'getting credit' respectively.

The United States is clearly one of the best countries to do business in, and this might be one of the reasons that despite media and campaign trail reports of slowing entrepreneurship and job creation in the private economy, both factors have done quite a bit to turn around, despite the huge drop in late 2008 and 2009.

Will Unemployment Factor into the Presidential Election?

President Obama recently stepped into some political hot water when he described the private sector economy as "doing fine," which caused Governor Mitt Romney to ask if he was out of touch.  President Obama was speaking at a press conference on the European debt crisis, and was referencing private sector versus public sector job creation.  It hardly matters in the world of politics, but on the matter that he was speaking, he was correct.  While I don't have jobs numbers, private consumption as a component of real GDP is up 1.9%, private investment is up 0.81% and it is government consumption that has become the current drag on real GDP with -0.78% in the first quarter of 2012 (Bureau of Economic Analysis).

The real story in the U.S. is still unemployment, which has not been fine for three years now. The current unemployment rate is 8.2%.  Will this persistently high unemployment cost President Obama a second term?

Nate Silver is a statistician with the New York Times who is famous for predicting 49 of 50 states in the 2008 Presidential election and all 35 Senate races.  On his website, he is stating that President Obama has a 62.6% chance of winning.  He also notes which states are most contestable; and because of our electoral system, those outcomes are the most important.
Will any potential changes in the unemployment rate because of Europe or an overall weakening American economy affect the upcoming election?  Here are some maps of key states (according to Mr. Silver) along with their unemployment rate difference year over year from April 2012.  Darker colors are improving unemployment numbers; click on the maps for greater detail.

Bureau of Labor Statistics

Mr. Silver is predicting Virginia, Ohio, Colorado, and Nevada to be won by President Obama.  He is predicting Florida and North Carolina to be won by Governor Romney.  Nevada and Ohio are especially looking like they are experiencing pretty significant job slumps in the past year or so, but will that matter?

I ran regressions on previous election years to see if it has mattered in the past.  They showed little correlation between difference in the three month employment change, or the unemployment rate generally and incumbent party win or loss.  With the year over year change in unemployment, they did show a r = 0.3734 which is still pretty weak, but much better than the other two.

These correlations are very low, and some basic transformations that I attempted did not help their r's at all.  It does seem that election year changes in unemployment have had a low impact on imcumbent election outcomes since 1948.  This is likely due to the multitude of different factors that voters must evaluate potential Presidents based on.  Many years economic factors are not even the most important ones.  Could this also be evidence supporting Bryan Caplan's idea about the myth of the rational voter?

The Recession That Never Ended

The United States has been out of recession since June 2009 according to the National Bureau of Economic Research (NBER).  Many Americans have not been helped by this recent economic growth as unemployment has remained above 9%, and long term unemployment has become a lingering and concerning problem.  Many pundits have been speculating that we may be double dipping back into recession, while others including Harvard's Kenneth Rogoff are contending that we never really exited the first one.

There is more than one way to skin a cat, and hundreds of different ways to mark growth or lack thereof.  The most common and official way to mark a recession is two continuous quarters of negative economic growth, with the recession ending as soon as positive growth is sustained.  Another way to measure a poor economy is the return to pre-recession employment levels.  We are still a long way from recovery by that standard.

This graph is from the website, Calculated Risk.  I think it paints a frightening picture of how far off from pre-recession levels that we still are at.  This employment contraction is enormously deep and enormously longer in duration.  If we do enter another sustained period of GDP negative growth, it will be historically merged with the recession that we just got out of in terms of return to peak employment.  Henry Farber wrote, "It is clear that the dynamics of unemployment in the Great Recession are fundamentally different from unemployment dynamics in earlier recessions."

One thing that I also take from this recession is that while modern monetary policies can be shown to have fewer recessions than previous monetary policies, their duration is getting longer.  The three longest contractions in employment are also the three most recent.  All of them pale in comparison to the unemployment problems of the 1930's.  It took them over a decade to return to the <5% rate that they had before 1929, and even then it was largely because of the armed services drafting individuals.  That can still be considered the outlier of all outliers in terms of post industrial revolution economic history.  There is one possible commonality.  If we do go into a second recession, our employment contraction will last over both of them, just as in the Great Depression and the recession of 1937 had two distinct recessions, but unemployment never returned.  The sad fact is that the 1930's unemployment had a better (if still unsatisfactory) bump in employment between 1933 and 1937 than we have had between 2009 and today (which perhaps says something about the New Deal versus the Stimulus).

This data points to a good research topic: why are modern contractions in employment lasting longer?  Is this simply a natural trade-off for monetary and/or fiscal policymakers?  Has the U.S. labor market become less flexible or resilient to or during contractions?  Is it a simple coincidence?

Christina Romer wrote a couple papers in the 1990's that dealt with recessions in terms of peak to trough.  She was dealing with a historical industrial index peak to trough.  One of them is "Changes in Business Cycles: Evidence and Explanations" (gated) which appeared in The Journal of Economic Perspectives in Spring 1999.  These studies show the effects that macroeconomic policies have had on contractions.  They have become less frequent, but longer in duration.  Recessions before macroeconomic policy making went into effect (1930's) were shorter with the only very long one (longer than 60 months peak to trough) happening in 1887.  This problem of prolonged employment contractions seems (particularly) to be getting worse.  Her studies can and should be updated to include this most recent and abnormal recession.  If macroeconomic policies are to be continued, we should attempt to alter them for these length problems, especially with regard to employment.

All of these numbers are incredibly depressing, but it is always important to remember that we've gotten out of every recession in the past and we will see sunnier days again!

Unemployment Makes You Less Valuable to Future Employers?

A friend of mine showed me this story from the New York Times.  It mentions that employers are now frequently only hiring individuals that are either working or very recently fired.  This makes it very difficult for many of the unemployed because an increasing percentage of them have been unemployed unemployed for a long period of time.

This is a frustrating fact of the labor market, so what does the economic literature have to say about this?  The labor market is a bit like a used car market, or as George Akerlof would call it, a "market for lemons."  Potential employees are not of known quality to prospective employers, and that makes this an asymmetrical information market.

I think this ultimately is a question of worker valuation, which is a human capital issue.  Gary Becker is the original human capital theorist, and he won the Nobel Prize largely for these ideas.  After he came up with that, it sort of transformed labor economics.  The idea with human capital is that our mind is a form of capital that we invest in through education, and see returns on through our wages and productivity.  At this point, economists can treat education and job training as investments and observe it in a similar manner to any other form of investment.  It can be seen as a bit idiosyncratic to the extent that wage elasticities can confuse economist's demand charts both negatively and positively.  Also due to the fact that people treat investments in human capital differently than they treat other investments.  They might major in a degree that does not have a (likely) high return on capital, and of course to the extent that they do this that investment is transformed into consumption.  So that's kind of the very basic premise of human capital theory.

I think the essay, "Does Unemployment Cause Future Unemployment" from James Heckman and George Borjas clears up the issue very well.  In it they write, "past unemployment (including previous time spent in a current unemployment spell) alters preferences, prices or constraints that determine, in part, future unemployment. For example, unemployment may lead to a loss of work experience, which will alter future prospects of employability. As another example, if workers are heterogeneous in unobserved components of ability, firms may use unemployment records in their hiring decisions if the knowledge that a worker has been unemployed is useful in sorting out the worker's position in the population distribution of heterogeneity and if firms place sufficient value on such information in making worker hiring and investment decisions. In both cases, prior unemployment experience has a genuine behavioural effect in the sense that an otherwise identical individual who did not experience unemployment would behave differently in the future than an individual who experienced unemployment,"  the essay was published in Economica, August 1980 issue.