‘Normal’ jobs are a safety net for entrepreneurs

Editor’s note: This post was republished with permission from the Ewing Marion Kauffman Foundation’s Growthology blog.

On the morning of the first Friday of every month, one of the most anticipated pieces of economic data is published by the Bureau of Labor Statistics. The monthly changes in the unemployment rate are consistently news and set the tone for conversations about the health of our country’s economy. Even changes of less than a percentage point are examined for any hints about the trajectory of job growth and the economy as a whole. Overall, it’s a useful data point and generates conversations about what the monthly and yearly changes in employment mean.

But employment is just one piece of the overall picture of a healthy labor market. And the labor market is just one piece of the overall picture of our country’s economic growth.

Labor Mobility on the Downswing

Labor mobility is one of the other pieces of the labor market that indicates more productive work. It represents a level of dynamism that sustains growth, but has been curiously dropping. When individuals are able and willing to 1) move from job to job, 2) from unemployment to a job, or 3) from a job to self-employment, they find matches for their skills and become more productive. Unfortunately, labor mobility has fallen from recent highs, which has contributed to the lackluster recovery of the past seven years.

This leads me to some new research about the explanations for decreasing labor mobility and decreased dynamism. In a new paper by Mike Konczal and Marshall Steinbaum of the Roosevelt Institute, they look at the more common supply-side explanations, such as occupational licensing, restrictions on housing and wage premiums at existing firms, for these deficiencies. However, they don’t find that any of these are the main drivers. In fact, their analysis suggests that a demand-side explanation more accurately describes the erosion of labor market fluidity.

This explanation challenged my previous assumptions. Improving labor mobility and fluidity are popular ideas that myself and others imagine can place the American economy on a faster growth path. In educating policymakers about how entrepreneurship can be such a growth strategy, often part of the argument is that entrepreneurship is another avenue within the labor market for the skills people already have to prove valuable. But the causes to economy-wide changes are rarely the result of a single cause or single type of cause.

The Labor Market Itself as a Safety Net?

The second idea that really struck me from this paper was the idea of the traditional employer labor market as a sort of safety net for entrepreneurs or the entrepreneurially-inclined. Konczal and Steinbaum layout the logic:

“Declining business dynamism and labor mobility are features of a slackening labor market and a deteriorating job ladder, which together mean that workers lucky enough to have formal employment stay where they are rather than striking out as entrepreneurs or joining young “start-ups” with uncertain prospects, since those workers may be unable to return to more stable employment if they fail. In this sense, entrepreneurship can be understood as one rung on the job ladder, and the labor market as a whole can be considered a safety net whose good health is a prerequisite for individuals to take risks that may end in failure.”

The examination of a safety net is something the Kauffman Foundation has been increasingly interested in. In the past year, the Foundation has explored the connection between social insurance (a grouping of different safety nets) and entrepreneurship. In this work, the more traditional avenues of social insurance are explored as space where policymakers can boost the incentives to become an entrepreneur. Unemployment insurance, parental leave, health insurance, and other welfare benefits, whether publicly provided or through markets all exist to provide those who exercise them the ability to recover from whatever shortfall they are in. This reminds me of the “temporarily embarrassed millionaires” idea, that although that individual isn’t where they want to be now, eventually they will find themselves prosperous.

To think of a traditional labor market, with rising wages and a functional job ladder (especially for younger workers) as a safety net for those who would pursue entrepreneurship struck me as novel. There have been a number of studies that detail how entrepreneurship relates to the labor market, from an idea of entrepreneurs assmart but illicit to an idea that entrepreneurs and traditional employees exhibit a pedigree and achievement gap. In our current labor market, where the indicators that would confirm that the overall economy is functioning close to or at capacity have yet to do so, that safety net aspect of the job market may be another space for policymakers to encourage more entrepreneurial efforts.

Chris Jackson | Courtesy of the Kauffman Foundation
Chris Jackson | Courtesy of the Kauffman Foundation

Chris Jackson is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, assisting in the understanding of what policies and environments best promote entrepreneurship and education in the pursuit of economic growth.

Find Jackson on Twitter: @chrisjack_son.

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