Discover why the U.S. economy has steadily recovered from the Great Recession, but not necessarily the job market.
Almost nine years after the Great Recession ended, entrepreneurs are forming new businesses at a fairly healthy pace again.
Here’s something they’re not creating at nearly the same clip: Jobs.
Start-ups are far leaner than they were before the 2007 to 2009 slump, relying on technology and a global workforce of freelancers. Full-time staffs, in many cases, are bare-bones.
Some entrepreneurs have limited hiring because they can’t get enough financing or are simply more frugal, especially after the financial trauma inflicted by the recession.
Take Calucro, a new company which has no staff and will help small businesses automate responses to customer calls when it starts running in about a month.
“You can be a lot more nimble if you don’t have a lot of full-time employees,” says Jeremy Brandt, the company’s founder. “I prefer to bootstrap it is much as I can at the beginning.”
On the one hand, technology such as cloud-based Internet services and a workforce of freelancers have allowed more Americans to start businesses since they require less capital and risk, says Sameeksha Desai, director of knowledge creation and research for the Kauffman Foundation, which studies entrepreneurship. On the other hand, those resources also let new firms do far more with fewer employees.
Growth in start-ups has been slow but steady over the last eight years. In 2017, about 415,000 businesses had at least one employee and were less than a year old, Labor Department figures show. That’s still about 9% below the 457,000 mark in 2007, but it’s an improvement from 326,000 in 2010.
There are myriad reasons for the upswing; Rising home values have allowed aspiring business owners to use their houses as collateral for loans, and a better economy has inspired more risk-taking.
That’s an encouraging trend. Start-ups are more likely than older firms to come up with innovations and new approaches that lift productivity — or worker output — and economic prosperity, says Mark Vitner, senior economist with Wells Fargo. Gains in productivity have been sluggish since 2011.
“Start-ups make many valuable contributions to our economy,” Vitner says.
Yet the 1.7 million jobs generated by new businesses last year was up from 1.4 million in 2010, but well below the 2 million positions produced in 2006. Even more telling is that new firms that survive aren’t adding many new jobs as they mature. Businesses 1 to 4 years old created an average 3.6 jobs per firm last year, down from about four jobs in 2006.
That group accounted for just a quarter of the economy’s 12.9 million gross job gains last year.
The decline in job creation by new enterprises could be a worrisome harbinger for the economy. New and young businesses traditionally have made up the lion’s share of all new jobs, according to Kauffman.
“An interesting question is the extent to which that will continue to be the case in the future,” Desai says.
Fledgling businesses with few employees also may grow less rapidly than those with larger staffs, further entrenching giants such as Google, Amazon and Facebook.
And the concentration of jobs among fewer large companies can discourage workers from switching positions and curtail wage growth, according to a recent analysis by Marshall Steinbaum, research director at the Roosevelt Institute, a liberal think tank.
There’s even some evidence that employees of start-ups are more likely to form their own businesses. About 38% of Americans who know an entrepreneur are ones themselves, according to a Kauffman study.
David Finkelstein, CEO of 4-year-old BDEX, which sells data on consumers to marketing and other companies, has a partner and three employees, all software developers.
The owners raised $1 million from angel investors, friends and family but spent the bulk of it on technology to track consumer behavior rather than employees. Finkelstein says he was chastened by his experience with an Internet service provider he formed in 1994, which had about 16 staffers.
“We spent more freely, and we were always in a position where we needed more money and didn’t have it,” Finkelstein says. “There’s a fear of running out of money.”
Financing can be a hurdle to hiring more employees. Nearly 60% of firms less than 2 years old had difficulty tapping credit or funds for expansion, according to a survey by the Federal Reserve Bank of New York in 2016.
An economic downturn also lurks in the back of Finkelstein’s mind. “There’s always a concern that conditions could worsen,” he says.
Finkelstein hires freelancers for tasks such as marketing, website design and sales follow-up through online platforms such as Upwork and Freelancer that quickly connect him with contractors worldwide. He pays only for the hours of work completed. The sales follow-up work costs about $1,700 a month, he says.
Finkelstein, who expects revenue to double this year to $3 million, says he eventually plans to hire more full-time workers as the amount of work grows and justifies the additions.
Justin McMorrow, president of Elsmere Education — which helps universities start and operate online courses — ran the company by himself for the first nine months after it launched in 2013. He gradually added six employees the first four years, and then 17 last year as he sold his services to more college departments and needed liaisons to the schools.
“We bring people on right as we need to,” McMorrow says.
He credits an armada of online technologies for the slim workforce, including Voice over Internet phone service; Salesforce.com, a customer management program for sales people; and Dropbox, a video- and photo-sharing service. He also hires subcontractors for graphic design, marketing and faculty training.
McMorrow acknowledges a bigger staff would allow him to sign up more colleges and grow revenue and profits more quickly. But the leisurely expansion means he can spend more time developing courses with colleges.
“For me, this is more personally rewarding,” he says.
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