Why Jobs Are Easy to Kill but Hard to Create

An expert on entrepreneurship explains why jobs could be scarce for a long time.

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Eight million may finally be enough. That's the approximate number of jobs lost since the recession began at the end of 2007. The latest government data show that after 23 straight months of job losses, the unemployment rate has finally stopped rising and started falling. That's the most hopeful sign to date that the tsunami of layoffs is abating. If the trend continues, it will confirm an end to the devastating recession.

[See 10 Retailers Gaining Strength From the Recession.]

But an end to job losses won't solve the unemployment problem. The U.S. economy needs to add more than 100,000 jobs per month just for the unemployment rate to stay even and more than that to get back to an economy that feels healthy. And there's little sign of new jobs popping up in significant numbers anywhere. To understand why, I spoke recently with Carl Schramm, president and CEO of the Kauffman Foundation, a nonprofit group that promotes entrepreneurship. Schramm participated in President Obama's recent "jobs summit" and advocates government incentives to help create and nurture small businesses. Excerpts from our conversation:

Were there any surprises at Obama's jobs summit? There were no real surprises. What I put forward in my breakout session, with [Treasury Secretary] Tim Geithner, was that we need a tax holiday for new businesses. The professors and economists all said no, we can't afford it; we must preserve Social Security at all costs. But I feel it's important to make the case for young businesses that create jobs. For instance, let's open our borders to foreigners who are studying at American universities. Give them visas so they can stay and start companies. We know from our research that one-quarter of all the technology companies in the U.S. were founded by immigrants.

You're well aware that there's a lot of political opposition to letting any new immigrants into the United States. If you're worried about illegal immigration, you could limit it to people who have Ph.D.'s or people who are working toward a Ph.D. That makes more sense than just allowing foreign-based venture capital in, which we already do.

[See how to tell if you're saving enough.]

Why do young companies matter so much? Young firms create jobs. Since 1980, firms less than five years old have been responsible for all net job creation in the U.S. It's the job of big firms to shed jobs. Big firms want to lower costs, which means lowering labor costs. That's why we've had this surge in productivity and rising stock prices. It's just the way the world works. That's why we've had the stock market rally. Big business is saying, let's substitute labor with machines.

Often during recessions, there's a spike in entrepreneurship, right? When a recession comes, what do companies do? They always go back to their core business, and all the experimental stuff goes. When firms cut during a recession, engineers or other innovators often take that intellectual property and start their own firms. That's one reason half of all Fortune 500 firms were started during a recession or bear market. They were started by people who were out of a job but had license to use some important intellectual property they were able to build a business around.

[See why stocks are surging as jobs disappear.]

So what's happening now? This is the first time in a recession that we've seen new-firm starts decline. That's a difference in terms of direction. If the numbers are correct, that means there's a very bleak future for jobs. The reason that the number of new firms has gone up in other recessions is that people were dislocated. We're seeing the most dislocation today since the early 1980s. The problem is that people can't get funding to start new firms. One way people have done it in the past is to borrow against their house, but we all know what's happening in the housing market. You can't really borrow against your retirement plan either, if it's down 30 or 40 percent like so many are. A lot of people used to do it on credit card debt, but they're not doing that now, and banks aren't making loans either. So there's no money to start a business. Those are the reasons that the number of new firms is down. Some of those would turn out to be high-growth businesses, but without them there won't be new jobs.

The unemployment rate recently improved. Is that a good sign? We've had this minor improvement in unemployment, a 0.2 percentage point improvement. I don't want to sound like somebody who wants that to get worse. Obviously I want that to get better. But I still think we're going to be in a prolonged recession, where we see a recovery in companies, and a recovery in the stock market, but no real pickup in jobs.

A lot of the lost jobs aren't coming back. People who were laid off at GE, for example, are not getting those jobs back. We need to create new firms to hire those people.

What should you do if you're an individual in a position like that? Get out and meet people and network. Get the relevant education you'll need. The easiest way to do that is to get into a community college. There are a lot of people with bachelor's degrees who are in their 30s and 40s who are enrolled in community colleges. It doesn't need to be getting a new degree. It could be computer skills. If you're out of a job and you're computer-illiterate, how can you look for a job these days if you don't know how to use computers? That's a skill you need to get.

[See 7 ways to survive the jobless recovery.]

And what are some new policies that would help? If I were a politician in Washington, I'd rename the Small Business Administration the New Business Administration. That's a bit tongue in cheek, but the point is, I'd want to get new businesses started and I'd want as many as possible to be high-growth, high-skill businesses.

I'd suspend a whole bunch of regulations, for new businesses only. Like Sarbanes-Oxley. Why is it so important for a small company to comply with all these reporting and record-keeping rules? It is a huge burden. If you're a huge company like GE, I can understand it. But if you have a market cap of less than $250 million, it doesn't matter.

What about taxes? I'd have a tax holiday for new businesses, those less than five years old. I'd eliminate irrational, noneconomic regulations. I'd allow more new visas for immigrants. These would be low-costs fixes that don't cost much, or anything. You could have a postdoctoral program for immigrants with Ph.D.'s, maybe pay them $50,000 for postdoctoral education. If they use that to start a business that hires people, we'd get way more than our money back.