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Makin' Money

Wanted: Entrepreneurs

Chris Farrell Sep 1, 2011

The jobs report comes out tomorrow, Sept. 2. Wall; Street economists are expecting a glum number. The consensus expectation is for a mere 70,000 expansion in payrolls. The unemployment rate is predicted to stay steady at 9.1%.

The dearth of new job creation long predated the financial crisis and long contraction. In this Bloomberg Businessweek story I look into the relationship between declining entrepreneurship and faltering job creation. “The job issue is really a start-up issue,” says Robert Litan, vice president of Research and Policy at the Kauffman Foundation.

For all the buzz in business publications about bold start-ups and TV ads extolling the joy of striking out on your own, there’s less entrepreneurship in the U.S. than there used to be. The U.S. created fewer start-ups that employed at least one worker in 2007 than in 1990, after adjusting for population growth, says Scott Shane, professor of entrepreneurial studies at Case Western University. The new companies that do get formed employ fewer people, too, according to economists Robert Litan and E.J. Reedy. They found in a recent Kauffman Foundation study that in the 1990s, new establishments opened for business with about 7.5 jobs on average, compared with 4.9 jobs in the 2000s.>

History may not repeat itself, but it offers intriguing parallels. Take Cleveland. (No, that isn’t the opening line of a joke. It was the Silicon Valley of the Second Industrial Revolution according to series of fascinating papers by Naomi Lamoreaux of Yale University and Margaret Levenstein of the University of Michigan.

Cleveland’s entrepreneurial energy from the 1870s to the 1920s was supported by a well-regulated banking sector, a relatively equal distribution of income, an educated workforce, and community elites willing to invest in infrastructure.

Well, contemporary America has faltered at making the kind of productivity-enhancing investments that powered entrepreneurship in Cleveland back then.

There isn’t any simple, single answer to America’s declining entrepreneurship. The question is, without greater efforts to reverse the trend, will the U.S. economy go the way of Cleveland, from a center of innovation starting in the 1870s to a symbol of the Rust Belt in the 1970s? It’s a chilling thought.>

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