Want to Cure Income Inequality? Promote Entrepreneurship.
One of the most pressing issues for our society today is income inequality: The rich get richer while the poor struggle to access meaningful opportunities. Federal Reserve chief Janet Yellen, President Barack Obama and former Secretary of Labor Robert Reich have all cited income inequality as a growing concern for our economic well-being.
A parallel concern is the sense that the primary path to generational advancement -- access to quality education -- is increasingly a product of privilege given skyrocketing college costs. Meanwhile, those who are fortunate enough to graduate from a top school often don’t pursue activities that benefit society or create additional opportunities for those around them. Then there's the logic of "meritocracy," the flawed logic that a young person who has worked hard and is smart deserves admission to a top school. In fact there's nothing particularly objective about who gets into the best clubs -- whether that means the best schools, law firms or corporate positions.
So, what can be done about the resulting bifurcation of people, into those with resources and social capital, and those without? What happened to upward mobility? Certainly, the $7.25 federal minimum wage isn't helping. Nor is the government's failure to tax big inheritances or the universities' failure to control costs.
Thankfully, there is a nongovernmental, non-redistributive approach to address all this income inequality. It's called entrepreneurship. It's called growing the pie, creating more decent jobs that pay more.
When I ran an education company in New York, one with more than 100 teachers and employees, I met a Dominican-American woman from the Bronx named Beretzi. She'd been hired as assistant to the office manager, an entry-level position, right after graduating from SUNY Albany. She excelled, got promoted numerous times over the next seven years and climbed the ladder to director of operations, eventually taking a similar management role at another company. Her family life was transformed; as her career developed, she helped out several of her relatives.
That's the beauty of entrepreneurship: If a new company is formed, it hires people and creates jobs in its community. As it grows, people’s opportunities multiply and wages rise. Inequality diminishes because people get pulled into good jobs.
Today, two-thirds of new net jobs in the U.S. are being created by new firms that are less than five years old. If you want to ease income inequality, what you want are more new firms starting up and seeking employees. Even a company that hired only, say, engineers, would support additional unskilled service jobs in the community for nannies, cleaners, hairdressers, bartenders and the like -- between two and five additional jobs per engineer. New companies create opportunities, which in turn increase the tax base and provide better access to education.
Yet while this "grow the pie" approach is universally appealing -- who doesn’t want more jobs? -- economic dynamism and small business formation are at multi-decade lows. All the hype around startups overshadows the fact that fewer people are starting new businesses today than at any point since 1978. The number of people under the age of 30 who own shares of a private business is at a 24-year-low, and the ratio of new companies to all businesses, between 1978 and 2011, has been nearly cut in half.
Over the same period, the proportion of American workers employed by companies less than five years old has dropped, from over 20 percent to less than 11 percent. And starting in 2008, the majority of U.S. workers, for the first time, worked at companies with 500 or more employees.
People who understand these numbers understand that lower rates of business formation are an economic disaster that will have repercussions for decades to come. Reversing these trends is the central economic challenge of our time.
What can be done? Broadly speaking, new companies need three assets to take form and grow: financial capital, team and talent and product-market fit. And though policy discussions often center around tax incentives and streamlining, any entrepreneur will almost certainly disagree. He or she will instead tell you that team and access to human capital are the most important factors in a startup's success.
With the right team and talent, you can get the money you need and devise your product or service. Intellectual capital drives financial capital and growth.
Consider Kickboard, a promising education software company in New Orleans with 20 employees. What does it need to grow? Its CEO, Jen Medbery, is looking for talented engineers to improve Kickboard's product, passionate salespeople to market and sell it, content developers to devise curricula, account managers to troubleshoot for teachers and operations people to design better processes. What Medbery needs, she says, is brainpower.
Imagine if Kickboard and every other promising startup and growth company in the country had a battery of top prospects lined up. Their odds of success would soar, along with job growth and innovation.
But, a reality check: Where is our talent currently heading? If we use educational achievement as a rough proxy for intellectual capital, there are six predominant paths. Three, easy to identify, are subsidized by the federal government: law school, medical school and graduate school. The other three paths, which benefit from tens of millions of dollars in annual recruitment resources, are: financial services, consulting and Teach for America.
The primary destinations, particularly for banking, consulting and law, are New York City, San Francisco, Boston, Washington, DC, Chicago and Los Angeles. A Kauffman Foundation study found that graduate-level technical students were less likely to start a business because of their greater likelihood of being recruited to professional services. So, the U.S. talent pool is doing six things in six places, little of which directly leads to new business formation or is likely to alleviate income inequality.
If our problems could be solved by having brilliant bankers/consultants/lawyers in our coastal cities, we’d be in great shape. Instead, these professions generally provide a services layer to more mature businesses without forming new ones. We’re investing in a ton of icing on top of a shrinking cake.
Now, here's an idea: What if we were to challenge our top graduates for their strategies to ease income inequality and build businesses? What if we told them, "We need you to do to create jobs. There are hundreds of newly formed companies around the country that need your talents to grow and succeed. And with your help some of these companies could grow to employ hundreds of people and create thousands of new jobs.
"We’ll give you the training, network opportunities, prestige and sense of community that you, as a young person, seek. Then, if you want to start a company, we’ll support you. Let’s revitalize the country and economy by having you help build companies that will lead to both the career and society you want."
Turns out, top graduates love this challenge. We’ve been posing it to young people through Venture for America and we already have ten times more applicants than we have spots.
Brian Bosche is an example. After graduating from Dartmouth in 2012 with an anthropology and environmental studies degree, Brian joined VFA. He moved to Detroit to work at Bizdom, a small business incubator funded by Dan Gilbert. Bosche noticed that small companies often struggled to both create and manage video content. So, two years later, he co-founded TernPro, which provides video content management services to small businesses. After just six months, his company already has six employees in Detroit and is poised to grow and create more jobs.
There is an army of young people like Bosche waiting to build things. Imagine if we were to meaningfully redirect the flow of intellectual capital to early-stage growth firms in cities around the country. The rate of job growth and innovation would measurably increase. Companies in healthcare, energy, education, transportation, retail, technology, agriculture and every other sector would have direct access to the talent they need to grow.
We’d also be training our graduates to become operators and the kind of people likely to solve problems and start businesses themselves. Entrepreneurs beget other entrepreneurs. Spending two years working at a growth company in Detroit produces a different sort of person than does two years as a lawyer in New York.
Let’s get our talent working on the challenges of this era. The message is to build something. To address income inequality, we need to spur new business formation and dynamism. To do this, we don’t need the government -- we just need to get our smart people building things again.