An UberX driver checks the app to see where other drivers are located.
Photograph by Evelyn Hockstein — The Washington Post via Getty Images

Before we send everyone to entrepreneurial training and encourage even more people to try and climb the economic ladder doing contract labor, we need to get a few facts straight.

By Jeffrey Pfeffer
June 25, 2015

Americans are a positive and optimistic lot, emphasizing that people need to go out and solve their own problems. That’s why there are myriad stories about Detroit’s comeback. And that’s why there are narratives like the following: “technology companies have contended that their virtual marketplaces, in which people act as contractors and use their own possessions to provide services to the public … afford workers flexibility and freedom,” writes The New York Times.

Of course, the California Labor Commissioner’s recent ruling that Uber drivers should be classified as employees has sparked renewed discussion as to whether being a contractor—and having access to no benefits, ranging from unemployment compensation, to worker’s compensation, to employer-provided health insurance—is actually such a good thing for workers.

Whatever the situation for workers, venture capitalists like this business model. In fact, they have invested more than $9 billion in so-called “on demand” companies since 2010. Clearly, there are going to be many more free agent opportunities ahead.

Meanwhile, we worship entrepreneurs and entrepreneurship, which is touted along with free agency as the answer to almost all our problems. Entrepreneurship is framed as the solution to almost everything ranging from poverty to women’s economic empowerment.

I have great respect for entrepreneurs and for the many people cobbling together a living delivering groceries, packages, and people. But before we send everyone to entrepreneurial training and encourage even more people to try and climb the economic ladder doing contract labor, we need to get a few facts straight.

Much of our policy discussions about income and unemployment proceed more from urban legend than data.

  • No, entrepreneurship has not soared over the past two decades. The Kauffman Foundation’s index of entrepreneurial activity shows no change in startup activity over the last 16 years.
  • No, there aren’t lots of people now working in new, young companies. According to the Bureau of Labor Statistics, in March 1994, there were some 4.1 million people working in companies less than one year old. The comparable figure for March 2014: 2.9 million. And the decline in the number of employees at younger companies holds for slightly older establishments as well.
  • The proportion of people working for the very largest companies, such as the Fortune 500, remains at about 17%. And that percentage has “been relatively constant over the last 20 years.”
  • People who work in larger enterprises earn more on average than their small-firm counterparts. According to BLS data from 2006, people who worked in establishments with more than 500 employees earned about 45% more than those working in places that had 49 or fewer people on their rolls. And what’s true in the U.S. also holds for the 27 countries in the European Union, has been true over the years, and continues to be the case.
  • A peer-reviewed academic study using data from Denmark concluded that entrepreneurial establishments accounted for “about 8% of total gross job creation in the economy,” and that “jobs generated by entrepreneurial establishments are to a large extent low-wage jobs.”
  • If new businesses are going to be the answer to our economic malaise, remember that about half of all new businesses fail within the first five years.

None of this should be news. In July 2010, former Intel CEO Andy Grove wrote an article for Bloomberg Businessweek in which he noted that, “employment in the U.S. computer industry is about 166,000 lower than it was before the first PC … was assembled in 1975.” Grove argued that new industries and high technology would not solve the country’s employment and wage problems. He also wrote that most of the jobs created by companies such as Apple and Amazon were either relatively low-paid warehouse jobs, retail jobs, or jobs that were being created offshore. He pointed out that Chinese contract manufacturer Foxconn then employed more people than “the combined worldwide headcount of Apple, Dell, Microsoft, Hewlett-Packard, Intel, and Sony.”

That same month, I met David Stockman, President Reagan’s former budget director, at the Aspen Ideas Festival. At a cocktail party discussing Grove’s recent piece, Stockman commented that from 2000 to 2007, a period of recovery from a recession and a time characterized by reasonably strong economic growth, the only employment sectors that had added significant numbers of employees were education and health care, both, of course, funded by the government. BLS data support his observations, and with few exceptions such as computer programmers and systems engineers, the trends Stockman noted five years ago continue to the present.

The inescapable conclusion from these and many other similar facts: new industries, new companies, and free agent employment relations are not going to fix the stagnant median incomes, growing income inequality, and persistent unemployment issues confronting the U.S. economy.

What might help?

As economist Paul Krugman ceaseless, but correctly, points out, the strong U.S. recovery from the recent severe economic recession is mostly a product of fiscal stimulus—government spending—and low interest rates. Macroeconomic policy clearly matters for stimulating insufficient aggregate demand and spurring investment through low interest rates. Governments need to continue to try to get macroeconomics right.

Second, as Grove suggested five years ago, the U.S. needs to rebuild what he referred to as “our industrial commons”—the system of incentives and taxes that develops technology and also encourages companies to scale that technology in ways that benefit U.S. labor markets.

And third, we may be able to learn an important lesson from one of America’s favorite pastimes, live professional sports. Over the years, free agency has come to baseball, football, and basketball, permitting players, particularly stars, to maximize their lifetime earnings by moving from team to team and by entering into long-term contracts that provide financial insurance in case of injury or deteriorating skills. That part of the story is well known.

What is less often acknowledged or appreciated is the role of the professional players’ associations—the, pardon the expression, unions—that have bargained to obtain a higher proportion of total revenues for their members, higher minimum pay levels, and better economic and injury protections for players. Even free agent stars understand that, collectively, they will do better if they work as part of a group rather than just negotiating completely on their own.

This lesson in the importance of collective action is a story now being repeated as many fast-food employees press for higher wages. It may be coincidence, but the stagnating wages of workers, not just in the U.S. but globally, has occurred at the same time that union density—the proportion of the labor force covered by collective bargaining—has declined around the world.

It’s election time again. We are going to be hearing a lot about jobs, the middle class, stagnating wages, economic insecurity, and the many issues confronting American workers. When politicians, or, for that matter, business leaders or policy experts, put forth their favorite remedies, let me offer some practical advice: spend some time looking at the facts. And then ask whether entrepreneurship and new businesses, free agent workers with no job benefits or protections, or any other new employment arrangement is going to make any discernible difference.

I fully understand why, in a deadlocked, toxic political era, with Congress enjoying little public confidence, it is tempting to believe that we can indeed pull ourselves up by our bootstraps—maybe by delivering more packages or groceries, working more hours, or starting a new business. But there is no evidence that any of these solutions will work for most, or maybe even many, people.

I wish it weren’t true, but as Andy Grove, among others, noted almost a half-decade ago, improving incomes and working conditions for U.S. employees will take more than just individual initiative and hard work, important as those things may be. Change in the labor market and its consequences for human beings will require public policies that make jobs—good jobs, jobs that provide a decent wage, jobs that provide some sense of security for the future—as much of a priority as profits and economic growth.

Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University. His latest book, Leadership B.S.: Fixing Workplaces and Careers One Truth at a Time will be published in September 2015 by HarperCollins.

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