Fluidity: How Mobility Enables Entrepreneurial Impact

fluidityA great city is “a collection of opportunities of all kinds,” said Jane Jacobs, the author of the seminal The Death and Life of Great American Cities.  In an entrepreneurial city, it is the fluidity with which these opportunities and choices can be used that helps drive entrepreneurial vibrancy.

This month I have been commenting on a Kauffman Foundation report by Dane Stangler and Jordan Bell-Masterson.  The report offers policymakers a process for evaluating and measuring entrepreneurial vitality and suggests four baseline indicators – density, fluidity, connectivity, and diversity – as a starting point for assessing the impact they are having on their local entrepreneurship ecosystem.  Last week, I wrote about density.  This week, I look at entrepreneurial fluidity, particularly as expressed through population flux and labor market reallocation.

Entrepreneurial fluidity is driven by the ability of individuals to freely decide their line of work, move between jobs, relocate to a new job market and chose to start new businesses.

Professor Carl Schramm at Syracuse University noted that at the economy-level, “the fluidity with which people may move freely between cities or regions, or switch jobs within the same city or region, provides the stability that permits successful adaptation through the rapid generation, absorption, and propagation of innovation.” According to Schramm, the opposite of fostering entrepreneurial fluidity is when bureaucracies perpetuate the status quo, and rules and regulations do not keep pace with changing circumstances.  

Phil Auerswald, co-chair of the Global Entrepreneurship Research Network, has described entrepreneurs as “Lego builders” who recombine existing resources—the Lego bricks—into new creations.  A vital resource for this is obviously talent and the ability to switch jobs, that is, the pace of worker churning, he says, plays a critical role in matching people with jobs. A relatively new dataset, the Quarterly Workforce Indicators, provides a measure of worker reallocation in the United States.

As with other indicators that gauge entrepreneurial vibrancy, what matters is not necessarily a snapshot, but the ecosystem’s fluidity trajectory over time.

Worryingly, it appears that the United States has lost much of its fluidity.  According to an NBER working paper issued in September 2014 (no. 20479), the ability of people to move between jobs has fallen by more than a quarter.  “The loss of labor market fluidity suggests the U.S economy has become less dynamic in recent decades," authors Steven J. Davis and John Haltiwanger conclude.

These charts from the Kansas City Federal Reserve show how job churn rates, by gender, have slowed during the past 15 years.

Although a number of factors may have contributed to the decline, at least a quarter of it, Davis and Haltiwanger point out, is explained by lower rates of new firm formation.

From the early 1980s until today, lower churn rates have signaled slower job creation.

Of particular significance, the authors said, is that “government regulation has played a role in slowing job and worker reallocation rates.”

The impact of fluidity on our economy is such that using state-level data, Davis and Haltiwanger found that “those states with especially large declines in fluidity also experienced the largest declines in employment rates, with young people disproportionately affected.”  Economist Mark Curtis in turn wrote in the Atlanta Fed's macroblog that "a decline in fluidity rates of this scope could indicate less innovation or less labor market flexibility, both of which are likely to retard economic growth."

If those economic units that are best able to unleash the necessary entrepreneurial fluidity show the greatest improvements in terms of standards of living, what can policymakers do to incentivize it?

Clearly, occupational licensing, less burdensome discharge laws, and more non employer-based health care insurance options all help make job changes less frequent.  However, in an age where technology and attitudes have challenged the whole notion of a “9-5 job” at a specific place of work, how to increase fluidity deserves deeper research, thinking, and discussion.  It just may not be as hard as we think.  

Next week I plan to look at connectivity as another metric to consider in evaluating an entrepreneurial ecosystem.
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