File Under "Reasons to Be Optimistic." Is Entrepreneurship the Reason US Recovery is Stronger Than Europe's?

The Global Entrepreneurship Monitor (GEM) report on entrepreneurial activity is promising on two counts for the US. First, it shows that the steady trend for entrepreneurial activity here is upwards. Second, it shows  a sharp drop in "necessity driven entrepreneurship," suggesting that the job market's recovery won't inhibit this rise.

The above chart shows the percentage of the population between 18 and 64 who are either a nascent entrepreneur or owner-manager of a business. While this number dropped through the worst of the recession, it has now recovered to its best levels in the century. (At 12.7% it is essentially where it was in 2012, when it hit 12.8%.)  That's great news.

When financial markets convulsed and credit disappeared, it made sense that the number of new business ventures would drop. But of course as layoffs spiked, it also makes sense that more people would be forced into entrepreneurship. If you can't find a job, you have more incentive to make one.

Well, the GEM tracks the relative prevalence of this ""necessity driven entrepreneurship," as well. It captures the percentage of folks who have gone the entrepreneurial route because they had no other options for income. 

As you can see, Spain - where unemployment is still above 20% - continues to rise in necessity-driven entrepreneurship. Such entrepreneurship is too often driven more by fear than hope. In the US, though, there has been a sharp drop in this type of entrepreneurship from 37% to 21% of total entrepreneurial activity. As the labor market has recovered, fewer Americans are forced into entrepreneurship.

Finally, Kauffman tracks entrepreneurs who are currently setting up businesses. These are ventures that still haven't paid salaries but promise to create jobs and wealth. This is a measure of early-stage startups. Here, the US stands out with rates that have doubled in the last few years and are double those in most of Europe.

This nascent entrepreneurship rate is a pretty shocking number, really. Not only has it jumped from 4.9% in 2010 to 9.2% of the workforce in 2013, it is more than double the rate in the UK (3.6%) or Norway (2.9%). 

Most of these startups will fail. Still, you miss all of the new jobs that you don't try to create. This bodes well for the US and could be the simplest explanation of why Europe's GDP is close to dipping into yet another recession even as the US is flirting with GDP growth of 4% and about to extend its record for consecutive months of job creation. It seems to me as good a reason as any for optimism. 

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.