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Entrepreneurship and the Workforce

Policy Dialogue on Entrepreneurship, PDE

Entrepreneurship and the Workforce

A growing economy constantly creates new job opportunities in new sectors, but also displaces and even destroys existing jobs. The workforce in an entrepreneurial economy must always evolve as well. Government efforts to protect jobs are often misguided, hindering growth and new job creation. Pro-growth workforce rules should instead focus on developing worker skills, allowing maximum hiring and layoff flexibility, and focus adjustment efforts on getting displaced workers into new jobs as soon as possible.  Small firms employ half of all private sector employees and create 60-80 percent of net new jobs in the U.S., according to the SBA. Labor rules are one of the largest barriers to entrepreneurial ventures.1  The World Bank’s cross-country comparison of labor regulations shows lower job creation where workplace rules are more rigid.2  Labor rules must move beyond the early 20th century framework of management versus labor and encourage new firm formation as well as a dynamic, not static, worker. 

Three Entrepreneurial Workforces

  1. U.S. policy should support the self-employed workforce and encourage more startups.
  2. Small and growing firms should not face large-firm workplace regulations that discourage hiring, flexibility, and growth.
  3. The government should not discourage innovative labor policies at big organizations (including government agencies) such as flexible hours and more.

Labor Market Rigidity Hurts Job-creation and Growth

  • Heavier regulation of labor is associated with lower labor force participation and higher unemployment, especially of the young.3 
  • In an open economy, flexible labor regulation can increase annual growth by up to 1.5%.4
  • Strict protection of jobs in many European countries inhibits job creation, explaining slow growth and higher unemployment rates. However, successful reforms in many European nations such as Denmark – allowing easy hiring and firing – confirm the wisdom of policy competition.5  
  • Venture capital has had difficulties taking off in Japan in part because of its traditional system of lifetime employment in large companies, which discourages existing employees from leaving to start new ventures, and impedes the rare entrepreneur’s ability to attract suitable employees or partners.6 

Burden on Small Businesses

  • Some employment regulations pose a disproportionate burden on small businesses due primarily to costs of compliance that don’t vary by firm size.7
  • Smaller and more entrepreneurial firms have higher turnover, and firms with higher turnover have higher productivity growth. The rate at which employers destroy job positions decline with the size, age and capital intensity of the employer.8 
  • Many of the U.S. labor regulations are the product of a bygone era when workers tended to hold jobs with one employer for longer periods of time.9

Pro-Growth Policy Action

  • Reform unemployment, trade-adjustment and similar programs. Implement a unified program that allows state diversity and creates positive incentives for finding a new job (not incentives for remaining unemployed), such as "wage insurance" instead of "unemployment compensation."
  • Efforts to address income inequality should aim to enhance the skills of lower-income earners rather than regulate wage and salary decisions in the labor market.
  • Repeal laws that mandate pay and benefits by occupation (e.g. Davis-Bacon).
  • Allow more flexibility in workplace rules, especially flex time among federal workers.

Baumol, William J., Robert E. Litan, and Carl J. Schramm, and Robert J. Strom.  Good Capitalism, Bad Capitalism and the Economics of Economics of Growth and Prosperity . 2007; Henrekson, Magnus. " Entrepreneurship and Institutions ."Comparative Labor Law & Policy Journal. 2007.

2  World Bank.  Doing Business Indicators . 2008.

3  Botero, Juan Carlos, Djankov, Simeon, La Porta, Rafael, Lopez De Silanes, Florencio and Shleifer, Andrei.  The Regulation of Labor. Yale University, World Bank, and Harvard University. 2004.

4  World Bank.  Doing Business Indicators . 2008.

5  Baumol, William J., Robert E. Litan, and Carl J. Schramm, and Robert J. Strom.  Good Capitalism, Bad Capitalism and the Economics of Economics of Growth and Prosperity . 2007.

6  Idem

7  Dixon, Lloyd, Susan M. Gates, Kanika Kapur, Seth A. Seabury and Eric Talley.  The Impact of Regulation and Litigation on Small Business and Entrepreneurship. An Overview . RAND Corporation. 2006.

8  Henrekson, Magnus. " Entrepreneurship and Institutions ." Comparative Labor Law & Policy Journal. 2007.

9  Phillips, Bruce D. " Liability Issues from a Changing Small Firm Labor Force ." National Federation of Independent Business (NFIB). 2005.

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