The Federal Reserve Bank of Minneapolis has a nice piece out examining many of the same issues we looked at in Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation but from a five state perspective.  I particularly enjoyed their interviews with some local entrepreneurs and service providers to provide additional reaction and context to some of their findings.  The five states they examine, because of their geographic responsibilities, are quite interesting on this topic - Minnesota and Wisconsin (not doing that well) and North Dakota, South Dakota, and Montana (doing better).  But even those states doing OK by the measures examined are only just holding steady.  Indeed, it's not that you're seeing better survival rates, better job creation, or better numbers of starts but that those things are trending down for the latter states.  This piece is worth a read and if you're doing a similar type of analysis at the regional level in the U.S. please let me know.  

In Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation, we focus on declining contributions of new and young firms to employment in the U.S. over the last decade.  And when people ask why this matters I say because "what you are born with is what you have to live with."  This is the most important thing I have learned from studying business dynamics at the national level.

What do I mean?  Look to the following chart from the report:



When we follow businesses born in the same year over time it becomes apparent that they follow some steady trends.  Namely, your total cohort employment tends to be fairly sticky at age 2 (the solid red line above), about as many hirings as firings in total, but by age 5 the total employment of the cohort has dropped to 90 percent of its initial total (dotted red line above).  Anything below 1 on this graphic means that the cohort of businesses has lost jobs in comparison to what they were born with; above it means the cohort has gained jobs in total.  Notice that the lines on this graphic are almost always below 1.  So, when a cohort of new businesses starts with less employment, it keeps less employment as it ages.  The BLS and Census data show that in the last 35 years, what a business cohort has started with in terms of employment is likely to be that cohort's maximum employment over time.  

As we point out in the report, the cohort of businesses started in 2009 began with between 700,000 and 1,000,000 employees fewer than would have been expected historically.  There is also evidence from BLS that this slow down in employment generation has been going on for much longer.  Thus, it seems we have been accumulating recent new business cohorts with less employment potential.  And indeed, what people fail to realize is that the population of U.S. businesses is just like the population of U.S. - a steady accumulation of years of small changes which often go unnoticed at any point in time (see Neutralism and Entrepreneurship for a good discussion).  In the U.S. case, new businesses provide a new lifeblood of business activity, fueling hiring, entry of more productive business concepts, and the like.  Individual U.S. businesses come and go but on the average there is a steady and slow accumulation of businesses, driven by new entrants over time.  With fewer and fewer jobs at the start and declining rates of employment retention in cohorts of businesses, as shown above, America's slow leak in job creation accumulates into a major part of America's jobs crisis.  

One of my favorite parts of the research I did for Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation was the creation of business growth charts.  Any parent has seen growth chats in their doctor's office when they take in a child.  They are a means of benchmarking your child's growth against the trends of past generations, providing you an objective way of understanding if your child is growing slowly or somehow might be showing signs of sickliness.  The business growth charts where modeled on this concept, and while this piece of my analysis didn’t make it into the final paper, I wanted to offer a snapshot of it for some of my readers on Data Maven because I think it is a very simple format that can tell a powerful, if complicated message.

Anyone following my blog knows that I have been spending a lot of time looking at jobs numbers in the U.S. as of late and am happy to say today that my report is finally out.  Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation is a look at long-term trends around job creation by young, U.S. employer firms.  Employer firms are important to track because they are the bigger starts, those with employees, and thus tend to have more of an employment impact on the larger U.S. economy.  I think for too long we have used tallies of new business starts as benchmarks of the health of the U.S. entrepreneurial system.  What this report shows is that young businesses have been undergoing some major change in the last decade, particularly related to their employment patterns, and that the immediate as well as accumulated effect of these changes is a major reason for the United State's current unemployment problem.  New businesses remain a critically important source for net job growth, but they are starting smaller and growing less in their first five years in comparison to historical trends. Throughout the week I'll be posting some portions of the report as well as some things that didn't quite make the final report but that I think are still very telling and of interest to a more technical audience.  Here are a few of the most important charts from the report.

A belated linking to stories on NFIB's downtrodden reports on potential hiring at small businesses.  NFIB's tracking of membership intentions is different from the other major surveys they complete, and I've highlighted before, but is generally seen as helpful in the direction, not the levels, that it reports.  Thus when they see falls in likely hiring, that's a concern.  

The Census Bureau's largest survey of young and small businesses, done once every 5 years, is out with new, and close to it's final, data publications using the 2007 Survey of Business Owners.  Check out the following topics on their site today.

Characteristics of Businesses

Data on American FactFinder (by gender, ethnicity, race, and veteran status):

Jointly Owned or Operated by Spouses: (Industry Detail) (Receipts Size) (Employment Size)

Majority of Business Family-Owned: (Industry Detail) (Receipts Size) (Employment Size)

Number of Owners of Business: (Industry Detail) (Receipts Size) (Employment Size)

Year Business Originally Established: (Industry Detail) (Receipts Size) (Employment Size)

Sources of Start-Up or Acquisition Capital: (Industry Detail) (Receipts Size) (Employment Size)

Amount of Start-Up or Acquisition Capital: (Industry Detail) (Receipts Size) (Employment Size)

Home-Based Business: (Industry Detail) (Receipts Size) (Employment Size)

Operated as a Franchise: (Industry Detail) (Receipts Size) (Employment Size)

Owned by a Franchise: (Industry Detail) (Receipts Size) (Employment Size)

Sources of Capital to Expand Business: (Industry Detail) (Receipts Size) (Employment Size)

Type(s) of Customer Categories: (Industry Detail) (Receipts Size) (Employment Size)

Percent of Total Sales Exported: (Industry Detail) (Receipts Size) (Employment Size)

Operations Established Outside United States: (Industry Detail) (Receipts Size) (Employment Size)

Outsourced Business Function Outside United States: (Industry Detail) (Receipts Size) (Employment Size)

Language(s) Used in Transactions: (Industry Detail) (Receipts Size) (Employment Size)

Type(s) of Workers Employed: (Industry Detail) (Receipts Size) (Employment Size)

Employer-Paid Benefits Offered: (Industry Detail) (Receipts Size) (Employment Size)

Company Had a Web Site: (Industry Detail) (Receipts Size) (Employment Size)

E-Commerce as Percentage of Total Sales: (Industry Detail) (Receipts Size) (Employment Size)

Company Made Purchases Online: (Industry Detail) (Receipts Size) (Employment Size)

Seasonal or Part-Time Business Status: (Industry Detail) (Receipts Size) (Employment Size)

Business Operating or Reason Ceased: (Industry Detail) (Receipts Size) (Employment Size)

Press Release

Summary of Findings

Characteristics of Business Owners

Data on American FactFinder (by gender, ethnicity, race, and veteran status):

How Initially Acquired Business

Year Acquired Ownership of Business

Primary Function(s) in Business

Average Hours Per Week Spent Working

This Business Primary Source of Income

Prior Experience Owning a Business

Highest Level of Education Completed

Age of the Owner in 2007

Owner Born in the United States

Service-Disabled Veteran Status

--Updated Post--June 15, 2011

I wanted to repost my comments from June 2010 at a National Academies' conference on how to increase innovation in federal statistics as the final report from the National Academies of that event is now available.  They picked up on some of my comments on user innovation, as did some of the agencies in the room.  I am pleased to report that some of the concepts I raised at the event have been implemented in different agencies - most concretely the idea of putting notices of opportunities to comment closer to where users are getting their data (Business R&D and Innovation Survey from NSF and Census is latest).  These are some small but good changes.  I still worry that the concreteness of that recommendation came through but some of the spirit of it might not have.  I'm going to be mulling over some of these concepts for an upcoming presentation I am contributing to, coincidentally at the National Academies, so will be thinking more on the subject again.  

As for the final report, I think there are some good things in it, but I must admit I was very disappointed in the event.  It was a discussion of innovation led almost entirely by the people who are already heavyweights in the system and that made range of the discussion very narrow.  I didn't see much of an outsider perspective.  The statistical system's real concern with innovation should be that they have so few interested parties in the room.  At that event there were a few of us not from the system as speakers but that was about it.  The room was packed with agency representatives.  Every major industry association and business group should have been concerned with that meeting if it was actually relevant because it'd mean that the system was trying to find ways to be relevant.  As I found the meeting, it was a discussion of how we can be better at things we probably should have been better at 10 years ago; not how we can be an innovative statistical system that measures the pulse of the U.S. and global economies and sets the tone for what innovation means in statistical systems around the world.  

--Original Post--June 28, 2010

Tuesday I will be a discussant at the National Academies’ Committee on National Statistics workshop in Washington, DC, looking at how to facilitate innovation in federal statistics.  It’s a topic I am passionate about and unfortunately it’s an area of interest where we often feel like soloists rather than members of a choir.  As we raise our calls for improvement and the need to better measure business activity we need more charitable foundations, academics, businesses, and local economic development officials at the table.  If it weren’t for the tireless work of groups like the Association for Public Data Users (APDU), I fear that the meager levels of innovation which currently exist in the system would be next to nonexistent. 

Desire for Internal Innovation.  In our experience dealing with entrepreneurship and innovation measurement, I’ve seen a lot of personnel within specific agencies that want to see more innovation in their products.  Sadly, too often these personnel have no forums or opportunities to explore possible improvements and few incentives that would encourage innovation.  More than any funds we’ve spent, our efforts to spur improvements in federal data on entrepreneurship and innovation have come mostly through convening of symposiums and workshops that allow agencies to present their plans for improvement, debate with academic and agency experts, and see what other exciting developments are occurring in academic and agency environments.  The returns to this dialog seem only to increase over time and seem well-placed for topics-based statistical discussions.    
   

Users Can Drive Innovation.  When you provide basic information, like the statistical agencies often do, one of the saddest parts of the process is that much of the information goes on to uses which you never become aware.  As a major producer of data, at Kauffman, I know how excited I get to see some of our data used in an analysis or something new but too often the public doesn’t circle back with this material.  We’ve seen in our own experience that if you create events, online platforms, and other vehicles to show your support of users that it can result in a positive feedback loop and improved data quality.  Through the Kauffman Firm Survey, we’ve undertaken an annual open call for suggested improvements in the data we collect which has over the years led to major improvements in the usability of the data for research and analysis.  Had we not undertaken this process of trying to interact with the users of our data we would have missed significant improvements in data collected on the finances of new firms which are going to greatly improve our analysis of the current recession. 

Sadly, most agencies know few of the users of their data, and even where they know them they are often hesitant to interact and hear their needs, feedback, etc.


Interaction, Interaction, Interaction.  I am not sure how many ways I can say it but I’ll say it one more – interaction.  The thing which I find most disappointing with the current statistical system is that individuals within agencies often want more interaction with each other and other experts on their topical collections but for the large part this does not happen.  Money to travel to conferences is very limited and the interagency groups and agencies overseeing some of this process only have opportunities for interaction at very high levels, not on more granular areas of interest and need.  At Kauffman we try to bring academics into the conversation but know that from trying to do this that it’s very tough.  Key constituencies like state representatives and sub-state representatives don’t have formal bodies where the agencies can receive feedback on possible data publications and so they don’t hear what these groups actually want.


Push Ourselves First.  As someone who takes time to read most notices about data collection on the Federal Register, I applaud the few efforts that actually submit meaningful requests for feedback and are open to feedback submitted.  In reality these processes are largely a formality that is hidden away so that as few people as possible find them.  Even submitted comments following outlined procedures can be dismissed as “it’s too late in the process.”  Let’s stop this self-perpetuating process of mediocrity.  If we are going to seek comment, seek comment. 


I’ve offered a lot of criticism here but I recognize that we at Kauffman still have a lot to learn in this regard.  One of the things are beta testing is this concept of a Data Wiki for the Kauffman Firm Survey.  It’s not something which was easy for us to do and opens us up to user feedback, positive and negative, in a much greater way that we’ve done before.  But this is also an area where we believe what we learn can help to inform the statistical agencies. 

In my opinion, until OMB and the agencies become more genuine in their efforts to draw data users into the conversation we have little room to complain about lack of funding.  These are things within their power to change.  We cannot afford to idly hope for improvements in national statistics.  I hope others out there agree with me and will add your voice to the discussion. 

Formal is better; informal the scourge.  While I still remain largely in that camp, I have to say that an article in today's Financial Times gave me some pause on this question.  Growing up in a middle class household in the U.S. Midwest left me with a world view that is intrinsically oriented to the formal economy - or at least I thought.  My grandmother, may she rest in peace, was an amazing woman and indeed the main entrepreneur who I have had in my life and yet I doubt very much that she always reported all of her income.  A highly ethical woman in my estimation, she was widowed with three children (one under 1) at about  the age of 30 and went on to send all of them to college while living independently and only remarrying briefly.  At the age of 88 she was still running her own seasonal business for most of the year and beating me handedly at any game that we engaged before her death.  Just as she probably used a bit of creative accounting to get by at certain times, today's article points out some of the ways in which certain economies are likely surviving currently because of their informal economies.  

I have spent a lot of time in Spain in the recent year which has brought me head long into contact with the informal economy.  Indeed, when first here I have to say I nearly burst a blood vessel trying to deal with some of the things which could only be done in the informal economy which I was used to being formal.  I had some of my most heated arguments and grandstanding trying to deal with people who by all appearances were part of the formal economy but apparently were not.  As the article rightly points out, Spain's informal economy must be among the biggest in the developed world.  And yet, with all of the economic pain and tumult in the Spanish economy, by my reading of currently available data Spain is the hardest hit country anywhere in terms of pre-Crisis and post-Crisis impact on new business formation and the existing small business sector, the Spanish economy is still functioning.  Yes, there have been some significant protests, but as I think the article correctly identifies if Spain didn't have some of this informal economy there is no way that it would not be in a revolutionary state.  (I am not sure it won't reach that state but it's not there currently.)  If the government wants to bring some of this informal economy into the formal economy, which seems necessary for longer-term growth potential, then it needs to face facts about the repressive regimes which remain in place for many formal business and other activities.  That said, in my opinion, Spain has no choice but to live with its informal economy currently as the changes that it needs to make to much of its burdensome regulatory and other regimes will take time and seem deeply, deeply rooted in culture and society. 

Well, that is all a bit of an aside probably for most of my readers.  I offer it only in the way of saying, this topic of informal economy measurement is extremely important.  Many of the data projects we have funded only focus on the formal economy because high-growth companies need to be operating formally (OECD and World Bank), but I am sure that this set of measurement issues is important and indeed will likely be incorporated by many scholars as a measure of institutions in different countries.  The Financial Times article is data driven, offering estimates from Friedrich Schneider that appear to be the going standard in this area, but it also has a nice discussion of the dangers of measuring the informal economy over time.  I would expect that we will see a lot more measurements of the informal economy as the markers of business and household activity (all the data we are leaving in our daily activities) explode in the coming years; it is these data or things like electrical consumption that seem most common bases for estimating the actual business activity in a country.  Those interested in this area should check out the article or the longer journal article which I have been told by experts at the World Bank is where they currently draw from:

Schneider, F. and D. Enste, 2009. Shadow economies: Size, causes and consequences. Journal of Economic Literature, 38(1): 77-114.

Here is a sneak peak at some of the data the Financial Times presents:

I just came across a blog from the Guardian, DataBlog, which could give way to hours or days of exploration - if only I had that luxury.  Perhaps my only complaint is that DataBlog seems to be covering everything and in every direction.  They have a database of databases that cuts across countries and topics from business registrations to abortion.  But as such, it's ironic that I'd find out about a major U.S. database on a U.K.-based site but that's just how the world works these days.  

The new database is from the Federal Emergency Management Association (FEMA) and provides state-level details about every declared emergency since 1953 in the United States by type of emergency (tornado, flood, etc.).  If you were wondering, Texas looks to hold the title of most declared emergencies in that time period at 3,293 - mostly hurricane related.  I can only imagine that this data will lead to finer-grained forthcoming data about these emergencies at a more local level or more metadata about the emergencies at the state level.  

So what does this have to do with entrepreneurship and innovation?  Well, it's probably more of interest to entrepreneurship scholars but from my perspective there remains opportunity to tell the story of how businesses rebuild, new businesses come in, and the general business dynamics recover after natural disasters.  The existing FEMA data looks to lend itself well to potential marriage with other data now available tracking cohorts of businesses over time at the state level that are available from the Census Bureau and Bureau of Labor Statistics.  Indeed, in my opinion, we are going to be seeing a lot of research looking at state-level impacts on entrepreneurship in the coming years.  I know I've reviewed two such papers this month, both of very good quality that make use of the confidential Kauffman Firm Survey data file.

Two additional concluding thoughts:

1. I'm introducing a new tag - state - in my tag cloud to start tracking state-level data sources which I come across.
2. On the very important topic of what we know about entrepreneurship and natural disasters, if you've got research or data in this area, please let me know as we get a lot of media requests on this topic, and it'd be great to be able to point to some quality academic work in this area.