Small businesses and startups have historically created the bulk of America’s jobs. Here’s how to get them hiring more again.
FORTUNE — Despite the strong monthly U.S. jobs report released last week, it’s likely too soon to cheer the positive numbers. In recent years, the number of jobs created has been anything but choppy; for instance, in October 2012 and again in February and November 2013, the U.S. economy generated more than 200,000 – enough to keep up with population growth. In December and earlier this year in January, however, that momentum lapsed when job creation dropped to less than 150,000.
It’s no wonder Americans remain anxious. In many parts of the country people don’t believe they will be better off in five years than they are today. This anxiety shakes the very foundation of the American Dream.
Up to now, Washington’s focus has been on macro-economic strategies, like deficit reduction, which is important. And, we’ve made real progress, cutting the deficit by half of what it was in 2009. But it’s not easing the anxiety felt by Americans, because the root of that anxiety is jobs or the lack thereof.
To fan the sparks in this latest jobs report we need to turn the country’s attention to how jobs are actually created — micro-economic strategies that put small businesses and entrepreneurship front and center. Small businesses are responsible for two-thirds of the net new jobs in our country, according to the U.S. Small Businesses Administration. However, there are three critical gaps that have put a damper on that job growth engine — the startup gap, the skills gap, and the capital gap.
Here’s what we can do:
Create startup ecosystems
During the last five years, the U.S. has created about 50,000 to 150,000 fewer new businesses each year, compared to pre-recession levels. That represents a significant loss in the number of potential new jobs. There’s a startup gap, and it is not just threatening so-called high-growth firms, like Facebook (FB) that started off with only a handful of employees and grew into something much bigger. It is also impacting Main Street, such as local restaurants, auto repair shops, dry cleaners and the like.
Since the Great Recession, not only are fewer entrepreneurs starting the next Facebook at lower rates than we’ve seen in the past, there also aren’t as many “mom and pop” businesses sprouting up on Main Street.
To close this gap, we need ecosystems that foster entrepreneurship similar to what we see in Silicon Valley. This is happening in some places across the country. In cities like Cleveland and Austin, collaborations between local government, the education and business communities, and others are creating new “institutions” like innovation clusters, manufacturing hubs, and startup accelerators. All provide paths for entrepreneurs to get a start, access capital, leverage existing networks, and most importantly, grow and create jobs.
But, we need to do more. This is not a question of government getting out of the way. Government needs to step up its game — and so does business. If you look at where these ecosystems are gaining momentum, it’s the result of strong public-private partnerships where governors, mayors, businesses, and others in the community work together over the long term toward to the same goal.
Fill the skills gap
Employers say they can’t find workers with the skills for the jobs they need to fill. Community colleges and other educational institutions across the country have been focused on this. The problem, however, is that most academic institutions typically plan their curriculums years in advance, so they may not be positioned to train workers in the time frame that companies are looking to hire for a certain skill set, according to Joseph Fuller at Harvard Business School’s Competitiveness Project.
This is a problem we can solve. Businesses need to put as much priority on their supply chain for human capital as they do on other parts of their materials supply chain. This means investing in partnerships with local universities and community colleges, being clear about their job needs, and working with government to build on training and apprenticeship programs that have been proven to work.
Acknowledge there’s a capital gap. And close it.
Small businesses and entrepreneurs are still struggling to access the capital they need to grow. Banks will tell you it is a lack of demand, that they can’t find enough qualified borrowers. Small businesses will tell you they are creditworthy, but go from bank to bank and can’t get a loan.
The reality is that for most banks, lending to small businesses, especially in the lower dollar range, is costly and risky. But it is these lower dollar loans that actually are most important to startups and small businesses in the communities hardest hit by the Great Recession.
And the gap is not just in bank lending. Equity capital for fast-growing firms is also scarce. The facts are telling: Seventy percent of venture capital goes to just three states — California, New York, and Massachusetts, according to PricewaterhouseCoopers. How much more could we grow the economy if innovative firms in Iowa, Arkansas, South Carolina, and others had more access to growth capital?
Interestingly, technology could be changing the game on the loan front. Dozens of entrepreneurial firms are building online marketplaces and using big data to shape algorithms that shed new light on the creditworthiness of potential small business borrowers. Many of the players are meeting in San Francisco this week at LendIt 2014, the second annual conference for this emerging industry.
Banks and credit card companies should take note and get in the game. The faster the market can deliver new and effective businesses credit assessment tools and marketplaces, the better for entrepreneurs and small business owners. Government guarantee programs at the federal and state levels would benefit as well, helping to narrow or close the small business capital gap.
America has a playbook for job creation, and it’s time to use it. Fifty years ago, if you wanted to create jobs, you simply called up the 50 largest companies. With the right tax incentive, big manufacturers would provide the jobs that promised a middle-class lifestyle to millions of families. That’s not the formula for today. The growth challenges are different, and the opportunities are actually greater.
The economic indicators tell us that this recovery game is one that’s still in progress. Some say that micro-economic strategies that focus on small business and entrepreneurs won’t move the needle. I disagree. They create two out of every three net new jobs, and have for the last 15 years.
It’s time we put entrepreneurs back in the game by giving them the support they need to start or grow their businesses. This is the playbook for creating jobs, and it’s time to use it.
Karen Mills is a senior fellow with the Harvard Business School and Harvard Kennedy School focused on competitiveness, entrepreneurship, and innovation. She was a member of President Obama’s Cabinet, serving as Administrator of the U.S. Small Business Administration from 2009 to 2013.