A Dynamic Workforce

Jonathan Ortmans, President, Public Forum Institute

It is inevitable that a healthy economy will create new job opportunities, while also displacing existing jobs, as successful ventures survive and grow while others fail– even in good times. The process of job creation and economic growth relies on the constant “churning” of firms. Even so, new firms are responsible for the large majority of net new jobs in the U.S. From 1980-2005, firms less than five years old accounted for all net job growth in the country.

This is why we need to approach labor rules carefully. Government efforts to protect jobs, when misguided, can backfire and instead hurt businesses and workers alike. The health care tax treatment for small businesses is a case in point, as I highlighted last week. Other employment regulations also pose a disproportionate burden on new businesses simply because the costs of compliance do not vary by firm size. Small and growing firms should not face the same workplace regulations as larger firms. Since new businesses have higher employee turnover, and firms with higher turnover have higher productivity growth, enforcing the same labor regulations on all firms could be detrimental to the economy.

The World Bank found that in an open economy flexible labor regulation can increase annual growth by up to 1.5%. Its cross-country comparison of labor regulations in 2008 revealed that countries where workplace rules are more rigid experience lower job creation. This is because labor regulation constitutes a large barrier to entrepreneurial ventures. Why take the risk of starting a new venture if in the future, when market demands change, the firm will be forced to keep a permanent workforce, regardless of changing market needs?

Pro-growth workforce rules should instead focus on absorbing the pain of having a large number of entrepreneurial failures by developing worker skills and focusing adjustment efforts on getting displaced workers into new jobs as soon as possible.  If we are not willing to absorb that pain, we will not reap the gains of vibrant entrepreneurship development and economic growth. Programs, such as wage insurance, create positive incentives for finding a new job.

Other programs go even further to help create jobs. For example, “FastTrac to the Future” is providing residents in the Detroit area the opportunity of long-term prosperity. This three-year economic recovery initiative is helping the region transition to new industries through entrepreneurship counsel and proven programs such as FastTrac® and the Urban Entrepreneurship Partnership. The former is an intensive 3-to-10 week training program for unemployed or underemployed individuals seriously considering entrepreneurship instead of finding another job. It is estimated that participants will create 400 new start-ups per year over three years. The Urban Entrepreneur Partnership (UEP) will target minority automotive suppliers, offering one-on-one, hands-on support to retool their businesses into other industries, such as aerospace, alternative energy, medical devices, and military and homeland security. Approximately 150 minority suppliers will be trained, coached and mentored.

We need to leave the image of a static worker or “lifetime employee” behind and encourage instead more start-ups. Labor market flexibility can contribute to this goal. Entrepreneurs can have more chances of succeeding where they can freely make decisions about their workforce. At the same time, workers have the best protection with flexible labor regulations that provide job opportunities and allow smoother transitions from one job to another. Our economy will benefit from a high degree of business and workforce dynamism.

 

Jonathan Ortmans is a senior fellow at the Kauffman Foundation where he focuses on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues.

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