New Businesses Lacking Job Creation

Now that the U.S. House of Representatives has decided not to extend long-term unemployment benefits past November, job creation is more urgent than ever. But recent statistics suggest that most new businesses are sole proprietorships or very small companies. Thus, new job creation remains elusive.


According to research by economists John Haltiwanger, Ron Jarmin, and Javier Miranda, new businesses are the key source of jobs in America. New businesses steer innovation and increase productivity, raising U.S. living standards in the long run.

While the recession has prompted many people to go into business for themselves, most of those newly created businesses are not the job generating kind. As of late, a large percentage of new businesses have been consultancies to other companies, or E-bay stores which are run by sole proprietors.

Traditionally, easy sources of start-up cash encouraged entrepreneurs to open businesses that quickly expanded by hiring employees. Trends have changed as the credit crisis causes banks to severely reduce credit card and home equity loans. Angel investors and venture-capital firms, previously strong sources of startup funding, have little cash to lend as they attempt to divest themselves of existing companies.

Other factors also inhibit new business creation. The wrangling in the federal government over healthcare leaves business owners unsure about employer responsibilities. They can’t project employee healthcare costs over the next few years. Additionally, tax laws, constantly in flux, leave potential employers wondering whether they will be able to afford to operate a business.

According to Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, a few fields stand out even in these troubled times. Biotechnology and healthcare draw money from both angel investors and pharmaceutical companies. He also points out that all businesses need less cash investment than they used to, due to rapidly dropping prices of software and hi-tech equipment.

Nonetheless, new businesses, and the new jobs they bring, are rising at a far slower rate than the economy demands.

Source: The Wall Street Journal

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