Entrepreneurs — and the innovation they generate — are the beating heart of the U.S. economy. Or at least they have been in the past.
But the heart of America’s economy isn’t doing so well these days. In fact, the sorry state of Startup Nation is just another example of how the supposed recovery is anything but.
The state of entrepreneurship in the United States is, sadly, weaker than ever. There are fewer new firms being formed today than two years ago when the recession ended. As the BLS described quarterly entrepreneurship figures, “New establishments are not being formed at the same levels seen before the economic downturn began, and the number is much lower than it was during the 2001 recession.”
But the startup jobs rate has collapsed in recent years. In fact, the rate of startup jobs during 2010 and 2011, years that were technically in full recovery, are the lowest on record.
So why is entrepreneurship still declining in the United States? … While this report documents a disturbing weakness in startup job creation, it does not explain the cause of decline. There is anecdotal evidence that the U.S. policy environment has become inadvertently hostile to entrepreneurial employment.
1. At the federal level, high taxes and higher uncertainty about taxes are undoubtedly inhibiting entrepreneurship, but to what degree is unknown.
2. The dominant factor may be new regulations on labor. The passage of the Affordable Care Act is creating a sweeping alteration of the regulatory environment that directly changes how employers engage their workforces, and it will be some time until those changes are understood by employers or scholars.
3. Separately, there has been a federal crackdown since 2009 by the Internal Revenue Service on U.S. employers that hire U.S. workers as independent contractors rather than employees, raising the question of mandatory benefits. New firms tend to use part-time and contract staffing rather than full-time employees during the startup stage. According to Labor Department data, the typical American today only takes home 70 percent of compensation as pay, while the rest is absorbed by the spiraling cost of benefits (e.g., health insurance). The dilemma for U.S. policy is that an American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors.
4. Finally, there has been a steady barrier erected to entrepreneurs at the local policy level. Brink Lindsey points out in his book Human Capitalism that the rise of occupational licensing is destroying startup opportunities for poor and middle class Americans. The quantitative impact of the shifting policies on startup jobs is in need of further study. There is a widespread sense that globalization of the economy exposes companies to new challenges by leveling the playing field for trade. There is no doubt a level playing field among economic institutions as well, where service-based employment can move quickly from one jurisdiction to another. By cracking down on employing Americans part-time, and mandating higher benefits, new American policies may be pushing jobs overseas. This is an issue policymakers must consider carefully when designing rules and regulations for the 21st-century economy