Startup Creation Sputters

Sep 18, 2012

Startup companies aren’t sprouting up during the economic recovery like they did before it started according to a study by Hudson Institute economist, Tim Kane.  “Job creation at new firms was at an all-time low in 2009 of 2.8 million, then fell again a year later by 250,000 jobs,” writes Kane.

As seen in the chart above, the rate of job creation collapse during the latest recession and hasn’t recovered. He concludes that “entrepreneurs are having a harder time starting a company today than at any time since the government began collecting data.”

What makes this recovery different for startups? Kane thinks it’s an environment more “hostile to entrepreneurial employment.” He writes:

At the federal level, high taxes and higher uncertainty about taxes are undoubtedly inhibiting entrepreneurship, but to what degree is unknown. The dominant factor may be new regulations on labor. The passage of the Affordable Care Act is creating a sweeping alteration of the regulatory environment that directly changes how employers engage their workforces, and it will be some time until those changes are understood by employers or scholars. Separately, there has been a federal crackdown since 2009 by the Internal Revenue Service on U.S. employers that hire U.S. workers as independent contractors rather than employees, raising the question of mandatory benefits. New firms tend to use part-time and contract staffing rather than full-time employees during the startup stage. According to Labor Department data, the typical American today only takes home 70 percent of compensation as pay, while the rest is absorbed by the spiraling cost of benefits (e.g., health insurance). The dilemma for U.S. policy is that an American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors.

Some of those fears are reflected in the most-recent U.S. Chamber Small Business Outlook Survey that found that 72% think the health care law will make it harder to hire more people.

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