Why The Rapid Recovery in Startups Might Not Be Enough

The good news is that the number of startups is rebounding to where it was in the late 1990s. The bad news is that because of economic changes, it takes more startups than ever to employ the same number of people. 

There has been a sharp uptick in the number of startups in just the last few years. (The bureau of labor statistics has reported numbers only through March of 2013.) 

In 2013, the number of companies less than 2 years old rose by 14%. 

The problem is not just that it is taking the rate of business formation a few years to return to normal. The problem is that startups don't create as many jobs. 

Software is now automating knowledge work just as machines have been – for centuries – automating physical work. While this raises productivity it destroys jobs.

It’s cliché – but still true – to say that the pace of innovation is obsoleting products, companies and jobs more rapidly than ever. As companies rapidly expand, shrink, and shift focus, they more rapidly create and destroy jobs.

Outsourcing is more common and that’s one reason that even successful entrepreneurs don’t need as many employees. The Kauffman Foundation reported that startups that needed about 8 employees in 2000 could support the same level of sales with only 5 employees today.

Automation, innovation, outsourcing and greater efficiencies contribute to an incredibly dynamic job market. In the second quarter of 2013, the US economy created 7.1 million jobs and destroyed 6.5 million. The net result was 603,000 more jobs than we had at the beginning of the quarter. That’s nice. But given the rate at which jobs are being destroyed, the economy has to create 12 new jobs in order to gain one. Compared to the number of entrepreneurs we’d need in a fictional world where jobs are created and kept for the length of a career, in this world we need about 12 times as many entrepreneurs.

The good news is that the rate of startups is recovering. The bad news is that it needs to be higher than it has ever been before in order to create enough jobs to bring back wage growth and full employment.