An economy that has struggled for growth for seven years showed fresh signs of trouble Friday with a sobering jobs report. Nonfarm payrolls climbed by a mere 38,000 in May—the fewest since September 2010. The Bureau of Labor Statistics also reported that a record 94,708,000 Americans were not in the labor force last month, as the labor-force participation rate fell to 62.6%, from 63% two months earlier.
When thinking about what has stymied the U.S. economy, I sometimes recall a biology lesson about the role that cell death plays in explaining embryonic development and normal growth of adult tissue. In economics, as far back as Joseph Schumpeter, or even Karl Marx, we have known that the flow of business deaths and births affects the dynamism and growth of a country’s economy. Business deaths unlock resources that can be allocated to more productive use and business formation can boost innovation and economic and social mobility.
For much of the nation’s history, this process of what Schumpeter called “creative destruction” has spread prosperity throughout the U.S. and the world. Over the past 30 years, however, with the exception of the mid-1980s and the 2002-05 period, this dynamism has been waning. There has been a steady decline in business formation while the rate of business deaths has been more or less constant. Business deaths outnumber births for the first time since measurement of these indicators began.
Equally troubling, the latest analysis of Census Bureau data by the Economic Innovation Group points to the increasing concentration of new business formation in a smaller number of U.S. counties. The findings show that 20 counties account for half of new businesses and that most counties had fewer business establishments in 2014 than in 2010. Even accounting for so-called dynamic counties, the total number of firms in the U.S. remains lower than it was in 2004.
As the Economic Innovation Group shows, the 1990 recovery registered a net increase of over 420,000 business establishments, or a 6.7% increase. The numbers for the 2000 recovery were 400,000 and 5.6%. Since 2010, the number of new business establishments has grown by only 166,000 or 2.3%.
One explanation for this subpar new business formation is the overall pallid U.S. recovery. Today’s new-normal 2%-growth economy doesn’t inspire vigor or confidence. Likewise the collapse, until very recently, of real-estate values, and the imposition of tougher standards on personal credit cards, have constrained traditional sources of credit for startups. Banks have tightened lending criteria and many regional and community banks have disappeared.
Many studies have also attributed the slow rate of business formation to the regulatory fervor of the past decade. Some point to the deadening effect of the Dodd-Frank law, which is 23 times longer than the Glass-Steagall Act passed in response to the 1929 Depression. One part of Dodd-Frank, the so-called Volcker rule pertaining to bank investments, has 1,420 subsections. Then there is the Affordable Care Act.
It is not clear to what degree these laws affect business formation, but in a 2010 report for the Office of Advocacy of the U.S. Small Business Administration, researchers at Lafayette University found that the per employee cost of federal regulatory compliance was $10,585 for businesses with 19 or fewer employees, compared with $7,755 for companies of 500 employees or more. Large and established businesses navigate through rules and compliance requirements. Small and new businesses often find them prohibitive.
Don’t just blame the feds. State and local regulators have also hampered new business initiatives, notably through the growth of occupational licensing. In 1950, 5% of workers required a license or certificate. Today that number is close to 30%. Fortunetellers, party planners, florists, shampoo assistants, cosmetologists, manicurists, beekeepers, librarians and many others have joined the ranks of licensed workers. As the rate of private-sector unionization has fallen, occupational licensing has become a new barrier to entry into the workplace and a tool to protect incumbents from competition.
Consumer protection from shoddy services, dangerous products, health and safety hazards is essential. But as the Texas Supreme Court showed in a recent ruling that licensing of eyebrow-threading is “useless,” licensing often has less to do with public safety and more with handicapping competitors. Fear of the gig and sharing economy, and growth in teleworking across state or local boundaries will undoubtedly stir existing businesses to step up their self-protective lobbying.
A July 2015 White House study found that licensing requirements vary substantially by states, irrespective of political leadership. Ohio imposes licenses on 33.3% of workers; in Florida it’s 28.7%; in California, 20.7%; and in Nevada, 30.7%. Sixty occupations are regulated in some way in all 50 states, with 1,110 occupations regulated in at least one state.
Certain demographic groups, such as immigrants and military spouses, are more heavily penalized by these licensing measures. For immigrants, the tedious and costly process of obtaining a license often delays their integration into the workforce. Thirty-five percent of military spouses work in professions that require state licenses, but they are also more likely to move across state lines than civilian counterparts, requiring multiple and lengthy relicensing reviews.
This is clearly an area for bipartisan action to harmonize regulatory requirements among states, increase multistate compacts to promote greater mobility and impose sunset reviews of licensing requirements.
Another troubling economic undercurrent is the decline of churn in the labor force. The flow of unemployed to employed has declined from close to 30% in 2007 to 16% at the trough of the recession to roughly 20% over the past two years. There has been a shift from full-time to part-time work, and the flow of workers to and from jobs has been dropping since the early 2000s, despite the drop in the unemployment rate.
In every quarter during the 1990s, six of every 100 workers moved to new jobs, while 5.5 out of 100 workers left their jobs. When they are not fired, many employees move from firm to firm, or different jobs within their firm in search of broader experience, better pay, better prospects for career-building and advancement or greater compatibility with personal needs. Historically, young firms have been dynamic job creators, but they now account for a smaller share of new hires, down from about 38% in the late 1990s to roughly 33% today, according to the Kauffman Foundation.
March data from the Labor Department’s Job Openings and Labor Turnover Survey showed that 5.3 million workers moved to a new job, down from 5.5 million in February. Close to five million left their jobs compared with 5.2 million in February. The good news was that there are now 1.4 unemployed workers for every available job, down significantly from 6.7 workers for every available job at the worst of the recession, and that 60% of workers are changing jobs willingly.
The ominous news is that these improvements haven’t been accompanied by sustained productivity growth. Measuring productivity is the subject of much debate, and there is considerable dispute about the impact of technology. Nevertheless, almost three decades of slower churn in the flow of business formation and business deaths, of less-dynamic labor markets, and of flat income growth point urgently to the need for better policy.
Washington and state governments need to wake up and remove obstacles to investment, new business formation and labor mobility. Encouraging investment in human capital and productive infrastructure is essential, and so is moving to financial and interest-rate conditions that promote investment and growth. That might give American investors and workers the bounce they deserve. What we’ve been doing so far hasn’t worked. Time for something new?