December 19, 2014

Can Entrepreneurs Fix the Job Loss Problem?

Today's version of "will work for food"Last month was a very bad month for jobs; the economy lost 533,000 jobs, the worst monthly decline since 1974.

People often talk about the importance of entrepreneurs as job creators in this country. So I got to thinking: how much additional entrepreneurial activity would have been necessary to avoid these job losses? The answer, it turns out, is a lot.

The Office of Advocacy of the U.S. Small Business Administration estimates that there were 637,100 new employer businesses created in 2007. That’s an average of 53,092 new employer businesses per month.

Each new employer business averages about 3.8 employees. That means that the 53,092 new employer businesses created every month generate about 201,748 new jobs.

In an average month, new employer businesses create about 38 percent as many new jobs as we lost in November 2008. So, if we could figure out a way to have increased new employer businesses by 2.64 times their average monthly rate during November 2008, we could have offset the month’s job losses.

But, we would probably need additional entrepreneurial activity to do this. A variety of estimates from the Census Bureau and other places indicate that only about one-in-four new businesses is an employer business. So in an average month last year, 212,367 new businesses were created to generate the 201,478 new jobs. That means that to create enough jobs to replace the 533,000 jobs lost in November, we would have needed approximately 561,033 new business starts. That’s a lot of entrepreneurial effort.

But we’re not finished yet. To create this number of start-ups, we need many more people trying to become entrepreneurs. Only about one-in-three people who begin the process of starting a business actually create a business within seven years. So, we would have needed about 1.68 million people to have initiated the start-up process some time before November 2008 to have replaced the jobs lost during the month of November. That’s huge amount of entrepreneurial effort.

What’s my point? It’s not to depress you. It’s to illustrate an important issue. As valuable and important as entrepreneurship is in this country, the scale of the economic downturn is so large that we can’t offset it just by boosting our level of entrepreneurial activity. We need to do something to fix what’s going on in the big companies too.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

23 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

23 Reactions

  1. There’s one question I have about jobs numbers: why they never count the entrepreneur’s own position as a “job.” In other words, every entrepreneur provides “employment” for himself or herself.

    I’m not saying that would cure all our job loss ills (because they’re pretty large) … just saying we have a skewed view of what constitutes “employment” in this country.

    In other words, if half the adults owned their own businesses in the United States or were self-employed freelancers, we’d think employment was horrendous. But it would overlook how people make their livings.

    Just saying, you know ….

  2. I am optimistic that small business owners will continue to provide strong job growth.

  3. The layoffs free up resources who are normally not affordable for small business owners. These highly skilled people are usually swept up by larger businesses with better compensation/benefits packages to offer. With access to a deeper talent pool, might small businesses have a higher success rate than normal?

  4. Interesting statistics. With the numbers you provided, I can see your point that entrepreneurs can only do so much. We need to not only concentrate on new start-ups but also enable bigger companies to re-hire employees also. That’s gonna be the hard part.

  5. I feel that with so many people now unemployed, we will soon see many more attempting entrepreneurial endeavours. It’s quite possible that this years large unemployment rate will have quite an impact over the next year. You may see a large increase in the number of entrepreneurs and home based businesses as a result.

    Its funny, but out of bad always comes good. And it just may be that the recent high unemployment rate, which has released many great minds as “free agents” so-to-speak, will benefit us all greatly in the future. Someone who may have been sitting in a cubicle for the last 10 years may end up delving into entrepreneurial endeavours and create or develop something that touches all our lives greatly in the future.

    It’s unfortunate that so many are suffering from the economic affects right now . . . but it is also possible that it could be a blessing in disguise for many of them as well. Because now they are free to take chances, follow dreams and manifest their true hearts desires.

  6. Great post and further proof that while most are fixated what really matters; having people step into a more self-empowering role either in a smaller setting OR in a shop of their own. Once people realize that big business sometimes means a “big yoke”, they’ll see how much they can do on their own, or in partnership with other entrepreneurs.

  7. Almost all big companies have started on a small scale and with an idea and business plan. Instead of handouts, bail outs, special favors for big business, anti-trust laws, etc, America has to get back to the origins of the foundation of the country. And then let the market play its role in full out. I use the French expression, laisse-faire, in order to get the point across. I have touched on these issues in my latest piece on Open Forum.

  8. Sorry for the typo. It should be Laissez-faire (leave alone in French). More jobs will be created if… Have a guess! ;)

  9. I hear you. New businesses will be a big part of the recovery process, but it will take years to recover from this many lost jobs.

  10. Novembers’ huge unemployment numbers speak more to the uncompetitive bloated payrolls of domestic global competitors than to “big business” problems. The skill set of entrenched employees is stale and getting more rusty each year. Continual employment must be earned each and every year. Seniority is an illusion. Just look to Detroitthey can’t buy a dance let alone a capital investment. Big companies are not the problem, unions are.

  11. Thanks for the analysis Scott. While entrepreneurial activity certainly can’t make up for the job loss, I do think a good number of people will turn to building their own small business during this downtown, most especially since the costs for doing so have decreased dramatically. Take Etsy for example – the company has enabled artisans and craftsman to easily market their handmade goods. As Chris mentioned in an earlier comment, this could be a blessing in disguise for some. That said, it will undoubtedly take years to recover.

  12. Nice job Scott, you lay those numbers out very well. I completely agree with your conclusion too, and to add to that, just a reminder that we in so-called small business aren’t in a vacuum either; those larger numbers of layoffs from larger companies, and worries about house prices, and lower value of our stocks and bonds all contribute to tough times and extra problems all the way down to those non-employee single-person businesses. It’s going to take something big and powerful to kick the whole thing out of the vicious cycle.

  13. Another point to consider is that of all those new businesses that launch each month, the vast majority won’t make it to their second year of business. Small businesses have a very large failure rate in the first year, so there would have to be some kind of padding to figure in failed businesses (often, startups) contributing to even more unemployment in the near future.

  14. We need to do something to fix what’s going on in the big companies too.

    What specific steps/actions we can do to fix or you have in mind to solve the problem in the big companies, Scott?

  15. “…the scale of the economic downturn is so large…”: that’s the problem; both small and large businesses (and everything in between), are challenged to find solutions (in plural, because there will need to be more than one solution to fix these problems). I do think that the media has to play a role in helping to turn this around; they are helping to create a self-fulfilling prophecy – write about doom and gloom enough, and it becomes the reality.

  16. Large companies have been making mistakes for sometime now. The economy was growing and they were eating it up. Now the economy is going down and they want loans from us.

  17. Support a small business today! Send online media and web design business to us today! Seriously, we are at the year and 4 month mark and it is tough, but we ain’t given up yet!

  18. Ooh. Promotion Jennifer huh? But in fairness to you Jennifer, I agree with that thought of supporting a small business. That will truly help.

  19. I beleive that the statistic of one in three people that actually create the business they intended to start will improve. Not to be too cliche, but desparate times call for desparate measures. This statistic does not take into account that many of those people had full-time jobs that they ultimately decided to stay with instead of start their own company.

    The reduction in workforce enacted by so many employers around the country creates more of NEED to actually create the venture and make it work. I think the number could to one in two people actually starting the business in these economic times. That would reduce the number of start-ups required to just over 1.1 million.

  20. Excellent points, great research. You’re right. Creating jobs is vitally important. But not saving the current ones would in effect create a situation of 1 step forward, 2 steps back, for rescuing our economy.

    Thanks for the post.

  21. By all accounts, adversity and our conscious reaction thereto are key drivers for reflection, creativity and a change in direction. To my mind, the shake-out we are only beginning to see will pave the way for a phenomenal increase in entrepreneurial activity and set the pace for the next wave of economic expansion.

  22. I definitely think that Scott makes a good point but I think that we take for granted that unemployment should be where it was during the nineties. Before the 90s, the unemployment rates we have been seeing would have been considered very low. Entrepreneurial ventures were a large part of that growth (tech boom) and now the economy is righting itself from two subsequent bubbles. I truly believe that small business will again lead out of this recession and many other businesses will grow as a result.

    Just my $.02.

  23. I am always searching for online resources that can help me. Thank you!

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