There’s an excellent post from Carl Schramm at th 4% Growth Project on the link between high unemployment and decreased rates of new business formation:
Perhaps the single most important indicator of the level of entrepreneurship is the raw number of new firms being formed every year. Historically the number was largely a guess. With new data resources, however, it appears that the number of new businesses started in any year had been extraordinarily stable. For at least a decade, without apparent regard for economic contractions and expansions, the annual number stood at roughly 700,000. But in 2009 the number started to fall precipitously. It is now estimated to be about 500,000 starts per year.
This decline provides a very important new perspective on, among other things, economic recovery, because new firms are so important to the creation of new jobs. New firms, prior to 2009, routinely created approximately seven new jobs during their first year. In 2011, the number fell to roughly five. Were 2007 patterns to obtain today, America could have had at least 400,000 new jobs in 2012 that weren’t created because 200,000 fewer firms got underway.
The data also permit us to speculate about a very important question: Why are fewer people starting new firms? Let me propose a link between new firms and the general level of economic activity.
Recently many economists, helpless to explain how to get our economy growing again, have defaulted to what might be called the “tectonic-shift” thesis. As they see it, the whole economic landscape suddenly changed in 2008. They argue that we will never see full employment at 5% again. Get used to it — the 8% nominal rate is the “new normal.” (For readers not versed in economics, 5% unemployment is viewed as equivalent to full employment — at any given time, 5% of the working population is moving from job to job. This is known as “frictional” unemployment, and it is nothing to be alarmed about; it is indeed normal.)
This default thesis may explain the unprecedented casualness (at least in my view) with which politicians and economists have dealt with unemployment during the last four years. They behave as if 8% unemployment is “normal,” or at least not really so bad. The media have done a good job of telling people not to expect much better, ever again. Politicians appear to want to believe that the current nominal rate of 8% is really the new frictional rate.
But if we are trying to explain why fewer entrepreneurs are starting businesses, the difference between the old 5% rate and the “new normal” 8 percent rate tells all. Would-be entrepreneurs are particularly sensitive to the unemployment rate, more so than might have been imagined. Put differently, entrepreneurs — who are alleged to have more finely tuned market intuitions than other people who make their livelihood in business — appreciate that, if their new business fails, their personal economic risk increases exponentially as the unemployment rate goes up.
I’m not so sure that’s the determinating factor. High-impact new establishments tend to be started during economic slumps. During the 1930s the economy eliminated many businesses but lots of new ones started up, particularly new businesses that exploited the new technologies that were coming along. Effectively, the economy went on a diet, shedding fat and adding muscle.
I think today is very different. The sectors that are growing are the ones with the most government intervention. We’re adding fat at the expense of muscle, the opposite of what we need to be doing.