US entrepreneurship woos wealthy, not enough middle class
Census data show that the portion of US firms and employment accounted for by startups has declined since the 1980s according to a Harvard Business School (HBS) report. However, respondents to a survey of HBS alumni paint a very positive picture of entrepreneurship in America.
Entrepreneurship here refers to firms that employ one or more workers not one-person operations that in today's increasingly casualised workforce may be a vocation of necessity not choice.
HBS alumni say that both the quality of America’s business environment and the ability of US-based companies to compete in global markets has improved markedly since the first survey in 2011. Entrepreneurship maintained its position as America's strongest competitive advantage when compared 17 other facets of the business environment. However, prospects for US workers are dimmer: "survey respondents remain pessimistic on balance about the likelihood that firms will lift American living standards by paying higher wages and benefits in the near term. Shared prosperity is not around the corner."
Jan W. Rivkin and Michael E. Porter — Prof Porter's most famous book, 'The Competitive Advantage of Nations,' was published in 1990 and in 2008 the Economist said that he was "the doyen of living management gurus" — say in an article in the study, 'The Challenge of Shared Prosperity' that contains the results of the alumni survey:
"Shared prosperity is a hallmark of any truly competitive economy. In fact, it is embedded in the very definition of competitiveness that the HBS Project on US Competitiveness adopted when the Project launched in 2011: The United States is competitive to the extent that firms operating here can (1) compete successfully in the global economy while also (2) supporting high and rising living standards for the average American. Competitiveness requires not just prosperity, but shared prosperity."
While the news is generally good for the ability of US firms to compete internationally, on the second half of the definition — the living standards of the average American — the news is less encouraging.
Rivkin and Porter consider just a few leading indicators:
"Shared prosperity in America requires strong job creation. Yet the long-run growth rate in the number of private-sector jobs in America dropped sharply after the year 2000 and remains near historic lows;
Among working-age Americans, the labour force participation rate peaked in 1997 and has now fallen to levels not seen since the early 1980s. Much of the decline has occurred because discouraged would-be workers have dropped out of the workforce;
If prosperity in America were being shared, we would expect the income of the median household to be rising in real terms. But inflation-adjusted median household income peaked in 1999 and, as of 2013, the latest year for which data are available, real median income was at a level first attained twenty-four years earlier;
The stagnation of the median is echoed in other parts of the income distribution. Households at the 20th and 40th percentiles of the distribution have languished with virtually flat real incomes for decades. At the 95th percentile, gains stopped more than a decade ago.
The academics say that while large firms in the US are thriving, mounting evidence suggests the possibility of trouble among small and young firms in America. The rate of new firm entry has trended downward in the United States since the 1980s: firms in their first year of operations accounted for about 13% of all firms in the early 1980s but only 8% in recent years."
The decline in entrepreneurial activity "was concentrated among Mom & Pop firms in the retail and service sectors during the 1980s and 1990s," but it appears to have spread to high tech industries after 2000.
They say that historically in the United States, small business and entrepreneurship have given Americans ways to climb the economic ladder. Weakness in the ladder’s rungs can only be bad news for shared prosperity. Notably, all of the trends we have mentioned started before the Great Recession. They reflect structural challenges, not a cyclical downturn. In recent months, many observers of the US economy have noted that labour markets are tightening for the first time since the recession, and they predict that wages will soon turn a corner. "We agree that to some degree, an upturn in the business cycle will boost America’s paychecks in the short run. But we see no reason to believe that a cyclical rebound will fix structural problems."
Karen Mills a co-author of the study who was President Obama's head of the US Small Business Administration from 2009 to 2013, says that:
"Small business owners have traditionally relied on the equity in their homes and savings to start their businesses. For the middle class, lower rates of home ownership and declining net worth may be making the accumulation of a 'nest egg’ of capital more difficult. Additionally, as student debt levels have increased over time, many would-be entrepreneurs likely don’t feel they can take on the risks of a startup. Another factor could be the declining rate of immigration."
The Wall Street Journal reported last January that the share of people under age 30 who own private businesses has reached a 24-year-low, according to new data, underscoring financial challenges and a low tolerance for risk among young Americans.
"Roughly 3.6% of households headed by adults younger than 30 owned stakes in private companies, according to an analysis by The Wall Street Journal of recently released Federal Reserve data from 2013. That compares with 10.6% in 1989—when the central bank began collecting standard data on Americans’ incomes and net worth — and 6.1% in 2010."
The Journal’s findings run counter to the widely held stereotype of 20-somethings as entrepreneurial risk-takers.
The average net worth of households under 30 has fallen 48% since 2007 to $44,354. More than half of 18-to-29-year-olds reported one or more financial problems in the past year, a 2014 Pew Research Center survey found.
Banks have cut back on lending to small business and startups while the Journal cites Donna Kelley, a professor at Babson College, who oversees an annual survey that shows young people are getting more risk averse — more than 41% of 25-to-34-year-old Americans who saw an opportunity to start a business said fear of failure would keep them from doing so, up from 23.9% in 2001. “The fear of failure is the measure we should be most concerned about,” she said.
The HBS survey took a close look at whether alumni want shared prosperity in America’s future or feel that unshared prosperity is acceptable. "The findings give strong evidence that most respondents, though not all, consider shared prosperity a high priority," the study says.
From the survey:
WHEN INFORMED THAT TOTAL INCOME OF ALL US CITIZENS will increase by $9tn in the next decade, HBS alumni predict on average that the richest 1% will garner 41% of those gains and those in the bottom 40% of the income distribution will receive just 12%. In contrast, respondents prefer that the richest 1% and the bottom 40% get 16% and 33% of the gains, respectively.
TWO-THIRDS OF RESPONDENTS consider it a higher priority for American society to address rising inequality, middle-class stagnation, rising poverty, or limited economic mobility than to boost overall economic growth.
SEVENTY-ONE PERCENT OF RESPONDENTS say that rising inequality, middle-class stagnation, rising poverty, or limited economic mobility is a problem for their businesses.
ON BALANCE, RESPONDENTS EXPECT inequality, poverty, slow growth, economic immobility, and middle-class stagnation to intensify in the coming decade if current policies and economic institutions remain in place.
Prof Michael Porter, in an interview with Charlie Rose in 2013