From unemployment to entrepreneurship

By Dale Mortensen

Nobel laureate in economics, Board of Trustees Professor of Economics at Northwestern University

It is well known that manufacturing employment has declined significantly in the United States, owing to the rise of manufacturing in developing countries like Mexico and China. But few recognize similar drops in other sectors, despite such trends' far-reaching economic, social, and political implications.

Since 1972, the number of telephone operators has fallen by 82%, typists by 80%, secretaries by 60%, and bookkeepers by 50%. Moreover, during the Great Recession, office and administrative jobs declined by 8%, production and craft jobs fell by 17%, and the number of positions for machine operators, fabricators, and laborers dropped by 15%. Employment in all other occupations either remained unchanged or grew.

Manufacturing occupations and administrative support used to employ millions. But technological advances have enabled many of these middle-class jobs to be automated or moved offshore - a process that is expected to accelerate with growing automation of knowledge-based activities and advances in robotics.

In theory, workers can adapt to these changes by seeking employment in occupations that include non-routine tasks, which cannot be computerized or robotized (at least not in the foreseeable future). These include highly paid positions like managers and technicians, as well as relatively low-paid jobs in protective and personal services, food preparation, and cleaning, but few "middle-skill" occupations.

As a result, the labor market is becoming increasingly polarized - a trend that many believe can be addressed with more and better education. But a substantial proportion of cognitively capable people do not respond well to formal education and, even for those who do, it is inadequate to provide the insider knowledge and wide-ranging experience needed to adapt, much less innovate, in a dynamic labor market. This shortcoming partly explains the prevalence of highly educated, unemployed young people worldwide.

Providing workers more options to enhance their knowledge and skills would enable them to capitalize on developing technologies, such as mobile Internet and social media, not only by filling positions at existing companies, but also by launching their own enterprises. Indeed, self-employment is an increasingly attractive option for workers seeking some semblance of job security in an unpredictable and challenging labor market.

Given entrepreneurship's potential to drive innovation and GDP growth, supporting such efforts is in everyone's interest. But commercial banks are reluctant to finance new ventures by unemployed workers with no collateral, making entrepreneurship a difficult path of labor-market adjustment in developed and developing countries alike.

In order to improve aspiring business owners' prospects, some countries have begun to offer start-up subsidies to unemployed workers, sometimes in lieu of unemployment benefits. But, while such policies help to reduce unemployment, their impact is subject to human-capital constraints, with many unemployed workers lacking the knowledge, experience, or confidence needed to launch a new venture.

Given this, start-up subsidies should be combined with subsidized entrepreneurial apprenticeships, like those that have provided training for masons, carpenters, plumbers, and electricians for decades (and, in some cases, for centuries). Such apprenticeships would help workers acquire the experience and know-how that they need to take advantage of the opportunities afforded by technological progress.

For example, specialty-shop owners often find that doing business online is far more profitable than operating a brick-and-mortar store, because online retail expands the market for the knowledge contained in the products that they sell. Similarly, the Internet is essential to the developing "sharing economy," which includes car-sharing providers like Zipcar and I-Go, and accommodation-rental services like Airbnb and Zotel. Such sharing-oriented businesses increase the productivity of existing capital, while creating new jobs for workers.

Initially, existing firms are likely to resist such apprenticeships, because investing time and resources in temporary workers - if not potential competitors - seems to conflict with their interests. Of course, once an apprenticeship program is operational, the larger benefits implied by a more productive economy and lower unemployment will become apparent. But getting there will require some convincing.

That is where governments come in. With effective subsidy programs, governments can induce young, successful businesses that are exploiting recent developments in information technology and related fields to take on entrepreneurial apprentices. Selecting innovative new firms, rather than established companies in traditional industries, is essential, not least because these are the firms that will provide most of the future employment growth.

Furthermore, these businesses are best suited to provide the relevant knowledge and experience for a start-up. And, in the case of a family-owned business seeking a new proprietor, training an apprentice can be an effective way to pass on the relevant knowledge, as well as the firm's assets.

Apprenticeships would facilitate the integration of younger workers into the labor force, while helping to correct skills mismatches among more experienced workers. But an apprenticeship should not be confused with an unpaid internship. Indeed, apprentices should be compensated at least at the minimum wage rate in a given occupation.

In addition to providing the funds for apprentices' salaries, governments must monitor progress to ensure that apprentices are gaining valuable knowledge and experience. At the end of a successful apprenticeship, a start-up subsidy should be available for aspiring entrepreneurs with good ideas and proven potential as business owners.

In a dynamic and unpredictable labor market, workers must be ready for anything. Apprenticeships could not only help to boost human capital, lower unemployment, and increase labor productivity; they could also help to fuel the innovation and entrepreneurial spirit that ultimately drive economic growth and development.

Copyright: Project Syndicate


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