Tag: goods-producing

2016 State of the U.S. Labor Force

2016 State of the U.S. Labor Force

By: Chuck Vollmer

11 January 2016

Download a copy of this report at:

 2016 U.S. Labor Force State-of-the-Union 11 Jan 2015

Executive Summary.  To get a true picture of the 2016 state of the U.S. labor force, one must examine all three labor force categories reported by the U.S. Bureau of Labor Statistics (Employed, Unemployed and Not-in-Labor-Force) as opposed to focusing on the “official” Unemployed rate known as the U3 rate, which represents only 2% of the U.S. population or 5% of the U.S. civilian labor force.  While Americans should be pleased that the U3 rate has dropped from its post Great Recession 10% peak to 5% today, America should concentrate on the combined non-working Not-in-Labor-Force and total unemployed (U6) population that encompasses 34% of the U.S. population.

US Labor Force Trends 2000 to 2016

 

From January 2000 to January 2016, the number of citizens Employed rose by 11%, Not-in-Labor Force by 37% and U6 Unemployed by 57%.  Since the end of the Great Recession in 2010 through 2015, Unemployment dropped by 40% but voluntary workforce departures continued a steady exodus reaching a high watermark of 94 million able-bodied adults who choose not to work.  If this trend remains unabated, Jobenomics forecasts that America’s able-bodied, not-working population could equal its working population by the mid-2020s, or sooner if the United States slips into recession.

By not including the able-bodied, not-working population in State of the Union deliberations, policy-makers play a statistical shell game with American citizens who cannot be expected to comprehend the intricacies of labor force statistics.   Sooner or later, the American people will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force.  The reason for this disquieting statement involves how government measures unemployment.  To be classified as unemployed, one must be looking for work.  Able-bodied Americans who quit looking and voluntarily depart the workforce are accounted in the Not-in-Labor-Force category—a category that is generally never mentioned in politics or the media.

While Americans should be pleased that employment is gradually increasing and the unemployment rolls are dropped significantly from Great Recession highs, they should be alarmed by exodus of tens of millions of able-bodied American adults to the netherworld of public/familial dependency and alternative lifestyles that harm economic growth and place greater burden on working and taxpaying Americans.

Jobenomics 2016 State of the Union’s Labor Force Assessment.[1]  As of 1 January 2016, out of a total U.S. population of 322,810,000[2], there are 70,874,000 citizens that cannot work (22% of the population consisting mainly of children, caretakers, retired, disabled, institutionalized and active duty members of the armed forces) and 251,936,000 citizens in the Civilian Noninstitutional Population (78% of the population consisting of all persons in the Civilian Labor Force and Not-in-Labor-Force categories that are 16 years of age and older and not inmates of mental or penal institutions or military active duty).

The Bureau of Labor Statistics (BLS) calculates the number of citizens in the Civilian Labor Force (persons classified as Employed or Unemployed) at 157,833,000 (49% of the U.S. population) and in the Not-in-Labor-Force citizens at 94,610,000 (29% of the population).

Within the Civilian Labor Force, the BLS reports on the total number Employed—currently 149,929,000 or 46% of the population—and six unemployment categories as shown below.  The most highly reported unemployment category is the U3 “Official” Unemployment category of 7,891,000 unemployed Americans (5.0% of the Civilian Labor Force or 2% of the overall population).  For this report, Jobenomics typically uses, for reasons explained herein, the U6 Unemployment category that consists of 15,625 000 citizens (9.9% of the Civilian Labor Force or 5% of the overall U.S. population).

URates

 

According to BLS, the basic concepts involving the U.S. labor force are relatively straightforward:

  • People with jobs are employed.
  • People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.  Marginally employed and underemployed personnel, who are actively looking for work, are reported as a subset of the Unemployed, and generally include part-time workers who work less than 35 hours per week.
  • Able-bodied adults who are neither Employed nor Unemployed are not in the labor force.  Those who have no job and are no longer looking for a job are accounted in the Not-in-Labor-Force category that includes people (over 16 years and older), or so-called “discouraged” workers, who choose not to work.

From a Jobenomics perspective, Not-in-Labor-Force personnel should be classified as unemployed in the same manner that marginalized and underemployed citizens are included in the U6 Unemployment category.  Determination whether a person is counted as unemployed should not depend on subjective, and often whimsical, survey questions used to appraise people’s employment intensions.

The four survey questions that government interviewers use to record a person as unemployed include (the bolded words are emphasized when read by the interviewers according to the BLS): [3]

  • Do you currently want a job, either full or part time?
  • What is the main reason you were not looking for work during the last 4 weeks?
  • Did you look for work at any time during the last 12 months?
  • Last week, could you have started a job if one had been offered?”

If a person answers yes to all four questions, that person is considered Unemployed.  If the answer is no to any of these questions, that person is enrolled in the Not-in-Labor-Force category.

Jobenomics’ 2016 State of the Union’s Labor Force Assessment.   To get accurate numbers in today’s labor force, Jobenomics uses a combination of Total Employed, U6 Unemployed and Not-in-Labor-Force obtained from the BLS Employment Situation Summary Report, Tables A-1 and B-1.

Jobenomics contends that able-bodied Americans who can work but don’t work, regardless if they are looking or not, should be considered unemployed for the same reason that “discouraged”, “marginally attached” and “part-time workers for economic reasons” are included in the U6 unemployment category.  The reason why the Not-in-Labor-Force and U6 categories should be examined collectively is for governmental transparency and accountability.  Sooner or later, the American public will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force.  The reason for this disquieting statement involves how government measures unemployment.  To be classified as unemployed, one must be actively looking for work.  Able-bodied Americans who are no longer looking are accounted in the obscure, under-reported and arbitrary Not-in-Labor-Force category.  A combination of the two categories gives policy-makers and the public a truer picture of the “functionally” unemployed.

In terms of the President’s State of the Union Address on 12 January 2016 and the Republican response, it will be interesting to hear if the dialogue revolves around the U3 “official” unemployment rate and the rate of employment expansion during the post-recession recovery period.  From a Jobenomics perspective, resolving the Not-in-Labor-Force challenge is a much more important issue regarding the state of our union, the health of our economy and vitality of our labor force.

Year 2000 Through 2015 U.S. Labor Force Gains/Losses.  From the beginning of year 2000 through 2015, the net loss to the U.S. labor force totaled 18.7 million people.

Year 2000-2015 US Labor Force Gains Losses

Employment grew from 130.8 million to 143.2 million for a gain of 12.5 million workers.

During the same period, the combined cadre of unemployed and voluntary departures increased from 78.6 million to 109.7 million for a loss of 31.1 million potentially productive workers.

It is also important to note that the U.S. population grew by 40 million people since year 2000—a 15% increase from 2000 through 2015.  To understand the effect of population growth, one must look at the BLS’ Employment-to-Population Ratio that is at its lowest level in 30 years.  The Employment-to-Population Ratio would be much lower if not for working women who were not engaged in the U.S. labor force in the 1970s as they are today.  For more information on this, go to http://Jobenomics.com.

The principle source of employment growth since the beginning of this century has been in the private sector that created 11.0 million new jobs (88% growth or 5.5% growth rate per year)  followed by government that created 1.5 million new jobs (12% growth or 0.75% growth rate per year).

Within the private sector, the seven service-providing industries (professional and business services; education and health services; trade, transportation and utilities; financial activities; leisure and hospitality; information; and other services) produced 100% of the jobs growth during the period with 15.9 million new jobs, or growth rate of 1 million new jobs per year.  The three goods-producing industries (manufacturing, construction and mining/logging) lost 4.9 million jobs during the period.  Jobenomics forecasts that the goods-producing industries will not produce a significant amount of net new jobs in the foreseeable future regardless of amount attention it receives and political rhetoric.  For more information why, see http://Jobenomics.com.

Year 2010 Through 2015 U.S. Labor Force Gains/Losses.  From the beginning of year 2010 through 2015, the post Great Recession recovery period managed by the Obama Administration, generated a net gain of 13.8 million people in the U.S. labor force.

Year 2010-2015 US Labor Force Gains Losses

Employment grew from 129.7 million to 143.2 million for a gain of 13.6 million workers.  During the same period, the combined cadre of unemployed and voluntary departures remained virtually the same (110.0 million in year 2010 versus 109.7 million as of December 2015) with reductions of the number of unemployed being replaced by voluntary departures.

The principle source of employment growth year 2010 through 2015 has been in the private sector that created 14.0 million new jobs (13% growth or 2.2% growth rate per year)  followed by government that lost 0.5 million new jobs (a negative 2% growth or 0.37% growth rate per year).

Within the private sector, the seven service-providing industries produced 87% of the jobs growth during the period with 12.2 million new jobs, or growth rate of 2 million new jobs per year.  The three goods-producing industries also generated 1.9 million new jobs during the period, or 13% of the new jobs generated during the period.

Private sector service-providing industries and small businesses have been work horses of the economic recovery and principle sources of new jobs.  Today, private sector businesses employ 85% of the U.S. labor force, of which 100,590,000 Americans (70.9%) have service-providing jobs and 19,651,000 (13.7%) have goods-producing jobs.  As reported by the ADP National Employment Report[4], which surveys 400,000 U.S. businesses each month, small businesses created over 3.5 times as many jobs as big businesses in the last six years, 10.5 million versus 3.0 million respectively.

Over the last six years, the highly publicized “official” U3 unemployment rate was cut in half, from 10% to 5%, with a lot of fanfare.  Similarly, the “total” U6 unemployment rate fell by 43%, from 17.3% to 9.9%, with a reduction of 10.6 million people in the U6 category.   However, many of these formerly unemployed simply quit looking for work and were recounted in the BLS Not-in-Labor-Force category that grew by 10.3 million people, essentially wiping out the positive U6 gains.

From a policy-making perspective, the 94.1 million Americas who are no longer looking for work needs significantly more attention than the 15.6 million Americans who are still looking or are underemployed.   The current BLS Employment Situation Summary Report states that 95% of the Americans in today’s Not-in-Labor-Force “do not want a job now”.[5]   Why should they?  America provides generous welfare and means-adjusted programs that are not tied to workfare like the most generous European nations require.  Rather than hiring, U.S. corporations are preoccupied using profits on mergers and acquisition, expanding overseas and relocating corporate headquarters in foreign countries as a tax-saving measure.  Learning new skills to compete for 5.1 million open America jobs[6] takes lots of effort, making it much easier to drop out of the labor force, go on the dole and pursue alternative ways of living.

Year 2015 U.S. Labor Force Gains/Losses.  In 2015, the U.S. labor force suffered a net gain of 3.3 million.

Year 2015 US Labor Force Gains Losses

Employment grew from 140.6 million to 143.2 million workers for a gain of 2.7 million jobs, which was supplemented by a gain of 0.6 million in the combined U6/Not-in-Labor-Force cadre, which remained at relative the same level from the beginning of the year, 110.0 million to 109.7 million respectively.  While the U6 unemployment rolls decreased by 1.9 million people, 1.2 million people quit looking for work and voluntarily departed the U.S. labor force.  Private sector service-providing industries and small businesses continued to the dominant forces in labor force expansion producing 2.4 million (90%) and 1.9 million (70%) of the 2.7 new jobs created during the year.

From policy and economic growth perspectives, 2016 State of the Union deliberations should contain an order of magnitude more labor force programs oriented to service industry vitality, small business hiring incentives and small business creation than programs for big businesses and government jobs that are unlikely to create a meaningful number of new jobs.  In fact, big business is likely to downsize even further in 2016 consider the historically high number and value of corporate mergers and acquisitions, international pursuits and corporate inversions—all of which have negative consequences for U.S. labor force expansion and prosperity.  Small business expansion provides the most bang for the buck for strengthening the U.S. labor force and stemming the erosion of the American middle class.

[1] Labor force data in this document is taken from the latest U.S. Bureau of Labor Statistics (BLS) Employment Situation Summary Report unless otherwise footnoted.  The majority of BLS data used is from Table A-1, Household Data, http://www.bls.gov/news.release/empsit.t01.htm, and Table B-1, Establishment Data, http://www.bls.gov/webapps/legacy/cesbtab1.htm.

[2] U.S. Census Bureau, U.S. and World Population Clock, http://www.census.gov/popclock/

[3] BLS, Who is not in the labor force?, http://www.bls.gov/cps/cps_htgm.htm#nilf

[4] ADP Research Institute, National Employment Report, December 2015,  http://www.adpemploymentreport.com/

[5] BLS, Table A-38, Persons not in the labor force by desire and availability for work, age and sex,  retrieved 10 January 2016, http://www.bls.gov/web/empsit/cpseea38.htm

[6] BLS, Job Openings and Labor Turnover Report, Table 7, Job openings levels and rates by industry and region, retrieved 10 January 2016, http://www.bls.gov/news.release/jolts.t07.htm

Manufacturing Industry Forecast

Executive Summary:  US manufacturing is not likely to employ significantly more Americans than it currently employs.

Overview:  Manufacturing is a vital component of our economy.  Unfortunately, Americans have unrealistic expectations regarding the role of the manufacture sector in our economic recovery as well as jobs creation.  The American economy is dominated by service-providing industries that employ the 86% of all Americans. Manufacturing (part of the goods-producing sector) employs only 9%.  Correspondingly, American policy-makers and opinion-leaders do disservice to the American public by heralding manufacturing over other industries.  Reasonable rates of employment and economic recovery can only be achieved via a balanced approach to resourcing and supporting all growth industries.  Most Americans understand how we transitioned from an agriculturally-based society to an industrial-based society, but have not come to terms with the ramifications of a postindustrial, services-based, internet-empowered society that is significantly less dependent on domestic manufacturing.

Total US Employment.  Out of a total population of 314 million, America employs 133 million people in three sectors: service-providing industries, goods-producing industries, and government services.  115 million Americans (including government employees) are employed in service related jobs, which equates to 86.3% of all working Americans.  The service-providing sector employs 93 million Americans.  Government (federal, state, local) is the second largest employer at 21.9 million.  The goods-producing sector is the smallest with 18.3 million.  Manufacturing is the largest goods-producing industry that employs 11.97 million, which equates to 9% of all working Americans or 3.8% of our population.   At 9%, it is difficult to assert that the US is an industrial or manufacturing-based society.  With 86% in service related jobs, America is better defined now as a postindustrial, services-based country.

Recent US Manufacturing Employment Statistics.   US manufacturing employment decreased 39% from its pre-recession high.  If adjusted for population growth, the declination is 55%.  Over the last two years, manufacturing employment has increased 4% but is now trending downward.  Jobenomics predicts that the entire US manufacturing sector (durable and nondurable goods) will not produce significantly more jobs than it currently does. 

In 1946, 11.9 million Americans were employed in manufacturing.  By 1979, manufacturing grew to 19.5 million.  Then the decline began.  Over the last three and a half decades, manufacturing has declined 39% to 11.97 million today.  Since the post-Great Recession low in January 2010, manufacturing has grown by approximately 500,000 people.  This is good news, but insufficient evidence to believe that a manufacturing renaissance is underway.

The US manufacturing sector is comprised of durable and nondurable goods.  Durable goods consist of machinery, appliances or equipment that are not easily consumed or destroyed during use and lasts for over three years.  Nondurable goods are items, such as food and apparel that are used up quickly or purchased infrequently.

Durable goods have suffered a 39% decline from the peak in 1979 and now employ 7.5 million people or 63% of the total manufacturing sector.  From its post-recession low in January 2010, durable goods have added approximately 500,000 jobs or a gain of 7%.  Much of this gain can be attributed to generous federal government stimuli and bailouts (e.g., the auto industry).

There are 10 durable goods industries or subsectors as defined the US Department of Labor’s Bureau of Labor Statistics (BLS) as shown above.  The transportation/motor vehicles/equipment sector is the largest subsector with 1,468,000 employees.

The American public generally associates the automotive industry with this durable goods industry.  However, according to the BLS[1], the entire US automotive industry (both foreign and domestic manufactures) only employs only 772,000 people in motor vehicles and parts manufacturing, or 10% of the durable goods sector, or 6% of the manufacturing sector, or 1% of all working Americans, or 0.2% of all American citizens.  These percentages are offered not to diminish the importance of auto industry manufacturing, but rather to emphasize that there are a host of other industries and sectors that are equally critical to the American economy.

One could argue that the auto industry supports a vibrant retail trade (services-providing industry) with 1,716,500[2] Americans employed by motor vehicle and parts dealerships as well as another 815,000 independent automotive repair and maintenance personnel.  This is true.   Automotive manufacturing supports a large indirect jobs tail.  However, it is also true that US automotive manufactures are no longer the dominant vehicle provider in America.  In September 2012, out of a total of 1,188,865 light vehicle sales[3] made in America, only 44% (538,752 vehicles) were manufactured by American auto manufactures (GM, Ford and Chrysler).  Consequently, foreign automotive manufacturers now have a longer indirect jobs tail in the US than American auto manufacturers.  This large indirect tail of dealer and maintenance jobs would exist even if the Big 3 did not.  This is not meant to imply that the Big 3 and domestic manufacturing is not important.  It is vitally important.  The point is that automotive manufacturing, as well as other durable and nondurable goods manufacturers, may not be the job creators that most Americans expect.  Our limited resources should be invested in industries that have the most economic and jobs creation potential.

Nondurable goods have suffered a 38% decline from the peak in 1979 and now employ 4.5 million people or 37% of the total manufacturing sector. From its post-recession low in October 2010, nondurable goods have added an insignificant number of new jobs.

Coincidently, the largest nondurable goods industry, food manufacturing, employs exactly the same number of people (1,468,000) as the largest durable goods industry, transportation, and twice as much as the entire automotive manufacturing industry.  In addition, as shown above, food manufacturing was much more stable after the Great Recession and did not need stimuli, bailouts and buyouts from the US government and its taxpayers.

Industry Employment Growth.  As stated previously, manufacturing employs 9% of all working American’s, but how has it grown compared to other US industries?

Since the beginning of this decade (1 January 2010) with a growth rate of 10.5% over this 32 month period, the manufacturing sector is the fifth best jobs generator out of thirteen US sectors.  This is a welcome development after decades of steady decline.  Will this growth continue in the future?  Probably not.

The latest Manufacturing ISM Report on Business[4] data (depicted above) shows that US manufacturing contracted in two of the last three months.  This is the first contraction since June 2009 at the end of the Great Recession.  Since the Great Recession, US manufacturing trended upward, leveled and is now trending downward.  Note: the Manufacturing ISM Report index uses values over 50% as positive (expanding) and values under 50% as negative (contracting).

This downward trend follows general corporate trends like declining corporate earnings that are predicted to go negative in the first quarter of 2013[5] after positive growth in the eleven previously positive quarters (see posting entitled, Uncle Sugar High).  To a large extent corporate earnings and manufacturing recapitalization are inextricably linked.  Corporations are less likely to invest and hire with poor earnings.

In addition, the World Economic Forum (WEF)’s annual forecast[6] shows a rapid downward trend in American global competitiveness after being #1 for years.  The WEF is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders.  Out of 144 countries, the WEF ranks the US #1 in market size, #6 innovation, #10 business sophistication, #8 higher education and training,  #23 goods market efficiency, #34 primary education, and #111 macroeconomic environment (i.e., low public trust in politicians and a perceived lack of government efficiency).  In 2006, the United Kingdom was #2, but disappeared thereafter.  Hopefully, the US will reverse the downward trend.  Competitiveness is paramount to success.

In the long-term, Jobenomics predicts that the manufacturing industry will not produce a significant number of new jobs for the following reasons:

  1. While the recent uptick in manufacturing jobs over the last few years has been slightly positive, the headwinds of the last three decades have not significantly abated.
  2. Emerging economies with lower labor rates, less regulations, better technical skills, and greater government underwriting will continue to be competitive in global manufacturing.
  3. US corporations will continue to outsource jobs to emerging economies despite government pressure and incentives to re-shore jobs. Many of the domestic job openings that require hi-tech skills will remain unfilled.
  4. The political ideological divide will prevent any meaningful pro-business policies, or significantly reduce the regulatory environment.
  5. The advent of the third industrial revolution has shifted the manufacturing equation from labor-intensive to technology-intensive and from jobs-heavy to jobs-lite with a premium on highly skilled labor as opposed to manual labor.

The American public generally understands the first four reasons even though they may be hard to accept.  Political rhetoric about streamlining the regulatory environment, increasing US exports, creating reciprocal trade agreements, imposing tariffs on cheaters, and lowering corporate taxes is good for elections but is not likely to be enacted nor achieved in the near future.  Free trade in a global marketplace will likely trump any attempts for protectionist legislation.  Mandatory entitlement programs will continue to drive government spending which is dependent on individual and corporate taxes.  In addition, corporations will, and must, continue to deliver profits to shareholders.  US multinational corporations will continue to expand overseas in emerging economies as opposed domestic expansion in the mature US market.   Finally, American workers, now the most productive workers in the world, will continue to produce more with less—requiring less labor per unit produced.

The third industrial revolution (reason #5) may be the biggest reason for a “jobs-lite” manufacturing future.  The first industrial revolution (IR1) took place in the late 18th Century with the mechanization of industry starting with the cotton gin.  IR1’s labor force consisted of high-touch, non-mass production, manual labor, which created the infamous sweat-shops in the 19th Century.  The second industrial revolution (IR2) started in the early 20th Century with the advent of Henry Ford’s moving assembly lines.  IR2’s labor force consisted of high-touch manual labor augmented by machinery designed for mass production.  The third industrial revolution (IR3) is currently underway.  IR3’s labor force consists of highly-skilled, hi-tech laborers who support digitally automated factories.  Each revolution has caused a reduction in low-skilled, high-touch jobs.

The third industrial revolution is powered recent technological advances including: artificial intelligence, high-speed broadband networks, robotics, web-based services, rapid prototyping (such as 3D computer-aided design and 3D printing), as well as innovative manufacturing processes that include better business process reengineering, global supply chain management, customer relationship management and enterprise risk management.   Consequently, most of the jobs will no longer be on the blue-collar factory floor but in white-collar offices.  Premium jobs will be for professional designers, engineers, logisticians, IT specialists and the like.  Old fashioned repetitive manual labor jobs are being eliminated or outsources overseas.  Traditional support staff jobs are also being eliminated or accomplished online.

In conclusion, manufacturing is vital to the US economy but is not likely to provide a significant amount of jobs to reach the Jobenomics goal of 20 million new jobs by year 2020.   20 million new jobs is a reasonable goal considering that the US produced 20 million new jobs in previous decades and that 20 million new jobs are needed for new workers (16 million per decade) and to decrease unemployment rates below 6% (4 million).  As such, it is imperative that the American public, policy-makers and opinion-leaders properly promote and support manufacturing in relation to the other twelve US employment sectors.  While major US durable goods manufacturers (such as automotive and aerospace) produce products that are a source of national pride, it is equally important to support less glamorous industries and businesses (especially small, emerging and self-employed) that are the engine of our economy and have the greatest jobs creation potential.


[1] Department of Labor’s Bureau of Labor Statistics, Automotive Industry: Employment, Earnings, and Hours, http://www.bls.gov/iag/tgs/iagauto.htm, July 2012

[2] Ibid.

[3] The Wall Street Journal, Auto Sales, Sales and Share of Total Market by Manufacturer,  http://online.wsj.com/mdc/public/page/2_3022-autosales.html, retrieved 3 Oct 2012

[4] Institute for Supply Management, Manufacturing ISM Report On Business , September 2012, http://www.ism.ws/ismreport/mfgrob.cfm

[5] The New York Times, Earnings in United States Are Beginning to Feel a Pinch, 16 September 2012, http://www.nytimes.com/2012/09/17/business/earnings-outlook-in-us-dims-as-global-economy-slows.html?nl=todaysheadlines&emc=edit_th_20120917

[6] World Economic Forum, Global Competitiveness Report 2012-13, http://www.weforum.org/issues/global-competitiveness

Nation of Shopkeepers

The epithet “Nation of Shopkeepers” was used by Napoleon to infer that a British merchant society was incapable of effectively waging war against the mighty nation of France.  Napoleon was wrong.   British merchants and industry provided the resources that enabled England, with half the population of France, to win the Napoleonic Wars.

The phrase, “Nation of Shopkeepers”, did not originate with Napoleon. It first appeared in The Wealth of Nations by Adam Smith in 1776.   Smith believed that when individuals pursue their self-interest, they indirectly promote the greater good of society. He argued that merchants, seeking their own self-interests, contribute significantly to the commonwealth by producing vital goods, services and tax revenues.  Without this “invisible hand”, societies would be incapable of effectively pursuing self-sufficiency, prosperity and wealth creation.

Recent articles in prestigious publications, like USA Today and The Economist, make similar claims that a nation of small businesses cannot compete in the global marketplace because:

  • Big is better.  Big firms employ more, are more productive, can reap economies of scale, can focus resources on innovation, offer higher wages, and pay more taxes.
  • Smaller means weaker.  Small businesses fail at greater rate than big businesses.    Small businesses are not particularly adept at creating jobs, at least not the best jobs.  Almost all the 6 million companies in the US are small businesses, with fewer than 500 workers.  Most small business owners just want to be their own boss and never expect to hire more than a few employees.

Like Napoleon’s premise that a nation of shopkeepers cannot compete, those that believe that a nation of small businesses cannot compete are simply wrong.  Small business is America’s economic backbone—producing $6 trillion worth of annual products and services and employing half of the American private sector work force.  Moreover, it is small business, not big business, which is the foundation of job creation.  Since the beginning of this decade, small business generated 95% of all new American jobs (see: Employment Scoreboard: March 2012).  As far as innovation, the Small Business Administration (SBA) reports that small business produce 16.5 times more patents per employee than large firms.

There are not 6 million small businesses in the US.  There are 27.3 million small businesses.   The latest available Census data show that there were 5.9 million firms with employees and 21.4 million without employees in 2008. These 27 million small businesses pay 43% of total US private payroll and are responsible for 97.5% of all identified exporters with 31% of export value as reported by the SBA Office of Advocacy.  Just as important small businesses do not export jobs like big businesses.

The perception that small businesses regularly fail is only partly true.  While the failure rate is high, so is their entrance rate.  A recent landmark Census Bureau study showed that small establishments are no more inclined to exit business than large businesses.   This misperception exists because of the high exit rate of micro-firms (1-4 employees), which averaged 18.4% over the last three decades.  While this rate was high, their entry rate was even higher at 21.3%, therefore producing a net gain of 2.9% over the period.  The entry/exit rate difference for all firms was only 1.9%.  Looking at this data from a different perspective, compared to all businesses, micro-firms were more likely to succeed, which is counter-intuitive to common perception.

More recent data, reported by the ADP National Employment Survey, shows that very small businesses with 1-49 employees grew +7% over the last dozen years, whereas small businesses with 50-499 employees and medium/large businesses with more than 499 employees lost -4% and -16% respectively over the same period of time.

According to a recent Kauffman Foundation Study, job growth in the US is driven entirely by startups.  The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing one million jobs net combined per year.   By contrast, in their first year, new firms add an average of three million jobs.  According to the Kauffman Foundation, “Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”

From a Jobenomics perspective the government’s primary jobs creation role is to create an environment where small, entrepreneurial businesses can flourish.  Unfortunately, government officials are locked in a mindset that a nation of “shopkeepers” cannot compete and the solution to growing the economy is a combination of big business and government. Perhaps the greatest factor contributing to this mindset is the scarcity of business owners working in government.  Furthermore, entrepreneurs and serial-entrepreneurs are almost completely absent in government decision-making.

Bureaucrats tend to view risk as a liability, whereas entrepreneurs embrace risk as an opportunity.  Serial entrepreneurs embrace multiple ideas, get companies started, and transfer leadership to operational managers so they can move on to new ventures.  Steve Jobs is an example of a serial-entrepreneur who created multiple iconic businesses.  Our country is blessed with tens of thousands of proven serial entrepreneurs.  Unfortunately, few serial-entrepreneurs serve on government economic councils that are replete with politically-correct and process-driven corporate chieftains and economists.

If small business is America’s economic engine, and if entrepreneurs and innovators are essential to business startups, then how does America change the government mindset?  The upcoming presidential election debates are a good place to start.

From a Jobenomics point-of-view, neither the President nor the leading Republican candidates have yet articulated a viable jobs creation strategy.  Virtually all of the proposed job creation plans are top-down political agendas oriented to ideologically-driven constituencies.  Almost every political speech contains references to a reformed regulatory environment, better tax incentives and cuts, debt and deficit reduction, helping the middle-class, importance of small business, revitalized manufacturing, green jobs, environment protection, energy independence, stimulation packages, tort reform, reciprocal trade agreements, and increased exports as ways to increase jobs.  While all of these areas are necessary, they are insufficient.

Political focus has to be on business creation, not job creation.  In recent years, small, emerging and self-employed businesses have been responsible for virtually all of America’s new jobs.   Yes small businesses fail, but enough survive to prosper our society.   Seven out of ten startup firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more.  From an entrepreneurial perspective, these are very lucrative statistics that should be the bedrock for a national business initiative to create millions, or tens of millions, of new small and self-employed businesses by year 2020.

A nation of small businesses empowered by 21st technology can compete globally in ways never before thought possible.  It is almost inconceivable that today half of America’s GDP is generated by 27 million small businesses.   It is equally inconceivable that 52% of these businesses are home-based.  Jobenomics envisions that the American labor force will continue to be transformed by small, largely self-employed, home-based businesses. This transformation will be lead by 70 million members of America’s millennial generation who will monetize the internet and social networks in ways not yet conceived.  The country that learns how to monetize social networks, like Facebook with 825 million users, will be transformed almost overnight.  Tens of millions of new businesses (mostly small and self-employed) will be created.

American innovation, ingenuity and entrepreneurship are the keys to a prosperous future where everyone who wants to work can find a job.  A national small business initiative starts with an achievable vision.  President Kennedy focused American science and technology on getting to the moon in a decade.  In comparison, the Jobenomics 20 million new private sector jobs by year 2020 (20 by 20) goal should be very achievable.  If China can lift 400 million peasants out of poverty in two decades, America can create 20 million new private sector jobs in one decade. Adding millions of new “shopkeepers” to a nation that is already of nation of small businesses could boost our commonwealth to new economic heights.