Why entrepreneurs alone cannot solve the jobs crisis

By Neil Patrick

In the UK, the recession is over apparently. The press and politicians are busy telling us things are steadily improving; Britain currently has faster growth than any other country in Europe. We have record numbers of new company registrations. And record numbers of people in (low paid) jobs. None of these things amount to recovery apart from in a technical sense that only economists would recognise.

This week I've been looking at how a favourite statistic of the media and politicians really stacks up.

The statistic in question is the number of businesses registered at Companies House.

Today, in the UK, there are 3,153,248 registered companies, up by 581,173 from last year. You'd be tempted to think this represents a growth new businesses by 18.4%. Except it's not. Granted, it is higher than it has ever been before, but its not really 18% growth in actual businesses or anything like it as I'll reveal shortly.

It’s typically quoted as an apparently simple measure of whether or not the business stock of the country is expanding or shrinking. It’s often presented as a measure of entrepreneurial activity.

We are told this record high number is a sure sign that we are on the path to recovery. But this deceptive raw statistic conceals the fact that this is a jobless recovery. And worse, it’s a low wage recovery to boot.

Jobs can only be recovered with the growth of new smaller businesses 

The news of vast redundancy programmes by large employers continues to fill the media almost weekly. In the UK oil industry alone it is reported that 37,500 jobs are at currently risk. There’s no sign of large-scale redundancies from our big employers letting up in the alleged recovery.

In large organisations, a relatively small percentage cut in headcount can easily result in tens of thousands of lay-offs. These jobs have to be taken up elsewhere and there’s really only one sector where this can happen - smaller growing private businesses. They are certainly not going to be absorbed by the public sector, which is still endlessly cutting jobs to meet austerity targets. 

And all the while, the march of technology is making people less and less valuable to organisations. This is what Jeremy Rifkin calls the zero marginal cost society and it’s becoming a reality faster than even he thought possible. I have provided an outline of this and what it means here.

Why record numbers of company registrations don’t mean a thing

In pre-election UK, the government is gleefully claiming a surge in business start-ups. A record breaking total of 581,173 new businesses were registered at Companies House last year. This was a higher total than the 526,447 in 2013 and 484,224 in 2012. 

Is this an explosion of entrepreneurial activity? Sadly no.

Office for National Statistics (ONS) data reveals that only around 60% of start-up businesses survive beyond their first three years. According to research by Richard Murphy at Taxresearch.org.uk, around half of the businesses registered at Companies House have never even filed a tax return! Let’s ignore the distracting question about tax avoidance; the matter I am interested in is what this tells us about the scale of real business activity.

The disappointing truth is this measure tells us nothing. Every year around 500,000 companies registered at Companies House are dissolved. The total of 3,153,248 ‘active’ companies on the register is a merry go round of new registrations, dormant companies, strike offs and disolutions.

Even if this were a meaningful measure of entrepreneurial activity, the trouble is that in the UK, 88.8% of all UK registered businesses employ less than 10 people according to the Office for National Statistics (ONS) here 

So if we take the 581,173 new companies registered for 2014 and assume that 50% are actual trading business entities, that means there were actually 290,586 ‘real’ new businesses registered in the UK in 2014. Assuming that 60% of them survive past 3 years, around 174,351 will survive. Assuming that by this point they employ an average of 3 people that’s 523,000 jobs…in about three years from now. 

Of course the number of new business start-ups is broadly encouraging, but it’s not a meaningful barometer for the health of UK business overall. 

UK redundancies are now at their lowest level since the beginning of the recession, but were still running in the last quarter of 2014 at around 35,000 a month. Assuming this were to flat line at this low level, three years from now, this would amount to 1,260,000 redundancies, almost two and a half times greater than my admittedly rough calculations of the creation of new jobs above.

Growth prospects for business in Britain 

When the coalition government came to power in 2010, the recovery strategy was simple.

The Bank of England ramped up quantitative easing and tag teamed with the Treasury to provide cheap cash to banks. Chancellor George Osborne allowed borrowing to remain high. In 2013, new Bank of England governor, Canadian Mark Carney, promised low interest rates for as long as was deemed necessary.

Demand and growth duly returned. Pay deflation effectively made British goods and services cheaper.

But this strategy has now been played out. Britain now has a new challenge. Today, the economy can no longer be propelled faster by keeping the foot on the QE/low pay pedal. Instead, its worn out and low-tech engine must become more efficient.

The productivity situation is especially dismal in Britain. Output per hour worked is still 2% below its pre-crisis peak; in the rest of the G7 group of countries it is 5% higher. The French could take Friday off and still produce more than Britons do in a week. Confounding the stereotypes, Italians are 9% more productive.

Britain’s workers are a bargain though, because their pay is so pitiful. Of the fifteen original members of the EU, only Greece and Portugal now have lower hourly wages. A British employee produces a fifth less their French counterpart, but he or she is more than a third cheaper to hire.

Britain has accomplished a recovery which has been fuelled not by growth in entrepreneurialism and productivity but a simple slashing of costs and an injection of cheap foreign labour..

And where investment is happening, it’s not in human capital, it’s in technology capital. This is why the outlook for future jobs still looks dire. And why average household incomes continue to fall:

Is there an end to the mass redundancies of recent years?

According to the Office for National Statistics (ONS), between October and December 2014 in the UK, there were 107,000 redundancies, an average of 35,600 or so a month – an annualised level of 427,200 a year. The good news is that the peak of quarterly redundancies is long past – there were a whopping 300,000 redundancies in the UK in January to March 2009. But there's a lot of ground to make up. In total, since Jan 2008, the UK has experienced 4,347,000 redundancies.

And low wage Britain has attracted a swath of eager immigrants from even lower wage economies around the world. This has been helpful for the short term in providing abundant low cost workers for business. But as the challenge shifts from survival to growth, this part of the workforce is not equipped to deliver this critical next stage of recovery.

The simple facts are that whilst job losses are slowing, and new businesses are growing, there are just not enough new businesses employing enough people to compensate for the endless stream of technology driven redundancies from larger organisations.

It’s this substitution of technology and low cost labour for higher skilled and higher paid people which means we have a recovery in name only. In essence, the relentless march of technology and global labour mobility is destroying jobs far faster than our economy can create new ones. And sadly the legions of brave new entrepreneurs cannot come to the rescue.

Why we all need to rethink our career plans right now

By Neil Patrick

We all need to think differently about our jobs and careers in the 21st century. This isn’t something which is ever talked about in the mainstream media. They are too busy reporting job losses and hunting down stories about new jobs being created. At best you’ll find tips about interviews or resume writing. None of this information deals with the fundamental shifts in society that we seeing today and which will become more and more dominant in the future. Worse, none of this really helps people who are desperately searching for jobs and trying to figure out why even if they have great qualifications, they still can’t find work…

What is REALLY going on?

Part of the reason for this tragic state of affairs is that the world is undergoing a radical transformation. It’s a change so great that nothing like it has happened for over two hundred years. It’s the endgame of a complex interplay between technology, energy sources, demographics, communications, globalisation and the biosphere.

Jeremy Rifkin’s latest book, “The Zero Marginal Cost Society” has set out an immensely insightful view of what’s really going on in the world today. And it has nothing to do with selfish businesses, greedy bankers or corrupt politicians.

As Rifkin says, “We are just beginning to glimpse the bare outlines of an emerging new economic system, the collaborative commons. This is the first new economic paradigm to emerge on the world scene since the advent of capitalism and socialism in the early 19th century. So it's a remarkable historical event. It has long-term implications for society”.

Technology will continue to make goods and services cheaper and cheaper until they are almost free

The trigger for this global change is something called “zero marginal cost”. Marginal costs are the costs of producing an extra unit of a good or service after your fixed costs are covered. All business people are familiar with marginal costs, most of the public isn't. And as I discussed here, marginal costs have been falling consistently for decades as technology progressively replaced expensive human labor and drove down the cost of production. I distinctly recall wanting a flat screen television about twelve years ago. I never bought one then, because they cost about £15,000. Today I could buy a bigger and much better TV for less than £1000.

Books used to be another thing I would spend a lot of money on. It wasn’t unusual for me to fork out £20, £30 or even more to buy a printed copy of a book that really interested me. Today I can download an electronic version usually for around £5. CDs would cost me £10-£15 each back then. Today, most CDs are about half that price and legal downloads even less.

Endlessly falling marginal cost means consumer goods and many services will continue to get cheaper and cheaper, heading ever closer to zero. Zero or near zero marginal cost is going to dramatically affect every single person in the world in the coming years in every aspect of their life.

A new economic paradigm is on its way right now

There's a paradox embedded in the heart of the capitalist market system that’s pretty much never discussed. This paradox has been responsible for the tremendous success of capitalism over the last two centuries. But here's the irony; the very success of this paradox is now leading to an end game and the new paradigm emerging is what Rifkin calls, “collaborative commons”.

In a traditional market, sellers are always constantly probing for new technologies that can increase their productivity, reduce their marginal costs so they can put out cheaper products and win over consumers and market share and beat out their competitors and bring some profit back to investors. So business people are always looking for ways to increase productivity and reduce their marginal cost.

But they simply never expected in their wildest dreams that there would be a technology revolution so powerful that it might reduce those margins of cost to near zero making goods and services essentially free, priceless and beyond the market exchange economy. That's now beginning to happen in the real world.

And the internet is at the heart of this transformation

The first inklings of this zero margin cost phenomenon was with the inception of the world wide web from 1990. Millions of consumers became prosumers with the advent of the Internet. Today, they produce and share their own videos, their own news blogs, their own entertainment and their own knowledge with each other. In these lateral networks, this is done at near zero marginal cost. It’s essentially free, completely bypassing the capitalist market.

This zero marginal cost phenomena wreaked havoc first on publishing businesses. Newspapers went out of business; they couldn't compete with near zero marginal costs. Magazines went out of business. Record companies went out of business.

But free stuff cannot easily be converted into stuff which earns us money

The strange thing about it is that at first a lot of industry watchers said this was a good thing. They argued that if we give out more and more information goods free and people are producing and sharing it free, these “freemiums” will stimulate people's appetite to want premiums and then upgrade this free goods and information by getting more customized information.

Musicians gave away their music free when they started to see this happen hoping that they would get a big loyal fan base and then their fans would be enticed to go to their concerts and pay the premium in order to be there in person. We saw a similar strategy with newspapers. The New York Times will give you ten free articles a month, hoping that you'll then upgrade to premiums and join their subscription service. It just didn't happen on any large scale.

This was very naïve by industry watchers. Sure, some people have moved from freemiums to premiums but when more and more information goods are out there nearly free shared with each other, music, film, arts, information and knowledge, the attention span and scarcity is not there to motivate people enough to want to pay for the premiums when they have so much available already for free.

What does this mean for jobs in the future?

All the while that this has been going on, jobs have become scarcer for more and more people. Even where human skills are required to deliver services, like healthcare, the ever increasing efficiency of the technology they use to provide care, means fewer and fewer people are needed.

The implications of the zero marginal cost society are huge. We all need to think differently about how we will earn a living in the coming years. There are several implications as I see it:

1. Even if we are working full time currently, it is almost certain that the number of people organisations require to do the type of work we do will continue to reduce. 
2. As traditional jobs continue to become scarcer, competition for the remaining jobs will continue to become fiercer. 
3. The loss of a job is likely to result in longer periods without work. The loss of income coupled with continuing outgoings, will continue to bankrupt many people. 

Placing our entire faith in our skills and qualifications that have enabled our careers until now, will therefore not guarantee our incomes in the future. We all need to plan for this eventuality and the start point for this planning is how we assess the personal assets that we have to deploy. And these may be very different assets to the ones which have enabled our careers up to now.

I believe that we can keep ahead of this tsunami of job destruction if we embrace three essential ideas about our careers in the internet age:

The importance of connectivity and personal networks. The internet facilitates the development of our personal networks. The largest numbers of opportunities will accrue to those who are the best connected people. This is why Linkedin and other social media is so important to all of us.

Collaborative approaches will yield greater returns than competitive ones. Building our opportunities will be less and less as a result of competition. More and more they will be the result of collaborations. People do business with people they like. And helping others out is the best way I know to develop the necessary goodwill for a relationship which has future value to both parties.

Personal intellectual capital and especially forms of creativity that cannot be easy replicated by technology will be the most resistant to erosion. We tend to think of intellectual capital as a very corporate thing. But every one of us has personal intellectual capital which is ours and ours alone. It might be great cooking recipes. Or a gift for oratory, or the ability to show great empathy. The list is endless. But more than ever before we need to clearly understand what our personal intellectual capital assets are. This will be the only way we can figure out how we can leverage our value and continue to earn money in a zero marginal cost society…

If you’re highly qualified, how come you can’t get a job?

By Neil Patrick

How can it be that so many highly skilled people are unemployed, while employers claim they cannot find people with the right skills?

Over the weekend I was reading The Third Industrial Revolution by Jeremy Rifkin. Although this book is about the economic, environmental, technological and social issues we face today, within its covers there is an explanation of this apparent contradiction.

And understanding this is of critical importance to anyone who wishes to prosper in their career over the long term.

We’re on the cusp of a new industrial era

Jeremy Rifkin has identified that industrial epochs are characterized by two determining factors. These are the dominant energy source and communication media.

So, the first industrial era was powered by coal and the prevailing communication medium was the printed word. Society organised itself around these…coal powered transport and industry and provided heat and light to homes and businesses. Print communicated everything from newspapers and novels to instruction manuals and bibles. All were committed to print.

The second industrial era is now in its death throes. This was driven by oil and the dominant communication mediums were radio, television and the telephone. In case you've not noticed, the oil is running out fast and TV and radio have ceased to be the dominant media they were in the last 60 or 70 years. Oh and it seems telephone landlines are becoming less and less popular too.

Rifkin believes that the third industrial era will be based on green energy and the internet. This change will have massive implications for the types of jobs we all do. The effects of the transformation will impact every one of us, not just those working in energy, communications and media. And there is clear evidence in many of the events that have unfolded over the last few years that he is right.

Rifkin even argues convincingly that the current financial crisis was a symptom of the end of the second industrial era, rather than the cause of it.

We’re all potential victims of accelerated obsolescence

So not only are we currently undergoing a transformation of society itself, the technologies which will define our society in the 21st century are undergoing a revolution too.

And because the pace of technological change is accelerating, very few people can assume that their skills will be current for much more than 10 years or so.

Google didn’t exist in 1995. Back then I would search the internet using a long forgotten search engine called Dogpile. Today, if a business doesn’t rank high on Google searches, it’s increasingly invisible and rightly or wrongly judged as second rate.

The credit industry was dominated by credit cards until 2008 and the financial collapse. Try finding a job today if you’re a credit card professional. Despite the credit crunch starting almost 6 years ago, one of the biggest UK credit card issuers, MBNA has been contracting now for years. It currently employs around 3,000 staff, down from 4,224 in 2011.

Yellow Pages was a huge global business for decades. But despite trying to shift its business online, it’s facing an inexorable decline in its relevancy. Not only that, it fails on environmental grounds too. The Product Stewardship Institute claims local governments spend $54 million a year to dispose of unwanted phone books and $9 million to recycle them. Phone books use low grade glues and are therefore difficult to recycle, and they often clog recycling machinery.

There’s no job security in established businesses either

Of course the decline in the fortunes of businesses is nothing new. What is new is that the speed at which a firm can move from established business and secure employer to contraction or even obsolescence. And if your career is tied up with one of them, your skills can become worthless very quickly.

The U.S. Postal Service suffered 30,000 layoffs in March 2010. Sears/K-Mart layed off 50,000 in January 1993. IBM layed off 60,000 in July 1993. And General Motors layed off 47,000 in February 2009. And these are just some of the biggest. For every one like this, there are hundreds of smaller less well reported downsizings and closures.

Organisations are very good at disguising their difficulties right up until the last moment. Are you really tuned in to the real situation at your employer? You need to be.

So if you are planning to work until you are 65 or beyond, you can fully expect that you’ll need to completely reinvent yourself at least 4 or 5 times over during your career. Note that I say ‘reinvent yourself’ not just change jobs…

Peter Weddle makes this comment on the ASQ blog. This is his take on it:

"Today’s turbulent economic environment has changed the way employers fill their vacant positions. Instead of using their traditional approach — hiring a person who is qualified for a job -they have turned to a new strategy that is best described as “talent staffing.” As a result, tens of millions of decent, dedicated and capable people — men and women who have successfully worked their entire lives — are now unemployed, unsuccessful in their search for a new job and unable to figure out why. No one has told them that the rules of the game have changed".

Do not confuse this with the economic downturn

It’s tempting to think that our recent woes are because of the recession. And that if and when things recover, we’ll all be much more secure in our jobs. Think again.

This isn’t a temporary state of affairs, it’s a paradigm shift which will continue to accelerate over the coming years and decades. It is this speed of change which means that often, skills which were cutting edge as recently as four or five years ago, can be obsolete today.

So you need to keep not just your skills but your TALENT up to date. And that’s the crux. If you are employed, you can fully expect that your employer isn’t going to react very enthusiastically to a request for a couple of weeks off work.  You're asking them to pay for you to learn some new stuff that may very well not be relevant to the job you are doing today, but which may be critical to the job you’ll need in say three or four years’ time…

If you are looking for work, you need to understand that employers will only hire individuals who have all of the skills to do a job and the state-of-the-art knowledge required to use those skills effectively on-the-job. They seek better-than-qualified persons to do a job, and they expect superior performance from them and from their first day of work.

This means they expect you to be the custodian of your talent value. That’s down to you not them.

What is talent?

Ironically, even though millions of people in Europe and the US are now unemployed and looking for work, a large percentage of employers believe there is a shortage of individuals with talent. They are quite wrong to think this of course. But perception is reality whether it is right or wrong.

Peter Weddle defines talent thus:

In practice, employers have defined a person of talent to be someone who has one or both of two attributes:

They have a skill that is critical to organizational success and a track record which demonstrates their ability to use that skill effectively on-the-job.

and/or

They perform at a superior level on-the-job which sets a standard that encourages their co-workers to upgrade the calibre of their work, as well.

The tragic irony is that employers do little or nothing to help their employees develop and hone their skills and talents for the future. So the moment you get hired is the moment your talent value starts to slowly but inexorably erode. You can be sure that your employers will only invest in you if they perceive a more or less immediate return on that investment.

What can you do about this?

Employers want to hire all-stars. Not just people who are good at what they do, but people who are clearly the best at that task. And the only way you can be such an all-star is if you are working with your talent.

First, make sure you know where your talent lies. Talent is not skill. Talent is an inherent capability, a natural capacity for excellence at a particular type of work. Talent is as individual as you are. But it cannot be universally used. No talent is compatible with all work, but every talent can be expressed in more than one career field. It can be developed to perform in one environment today and another tomorrow. But before you can do that, you have to understand precisely what you are talented at.

Second, make sure you are working in a career field and for an employer that enables you to express your talent. Employers aren’t hiring your skill, they’re hiring what they think will be your total contribution to their organisation. And right now if you have a job and your work isn’t allowing you to demonstrate your true talent, then it’s time to be looking elsewhere, even if you think your current job is OK.

Thirdly if you’ve identified your talent then you must do everything possible to nurture it, especially if you are not able to do this in your normal job. Because this isn’t something you can achieve in a few weeks or months, doing this while you are employed is vital.

Finally, you must step back and take the long view. The prospects for your firm and industry affect you. Directly. Whilst it’s easy to think that when Lehman Brothers collapsed in September 2008, it was an unpredictable event, the truth is that there were signs at least one year earlier that the firm was in financial difficulties. Moreover, five years earlier, in 2003, it had suffered an $80 million penalty from the SEC for using its researchers to unduly influence market prices.

Yes, it’s unfair that the rules of the game have changed. And yes, it’s even more unfair that employers never bothered to tell anyone about it. But if you step back and understand what is going on, you’ll be better equipped to deal with the reality. And if you fully embrace the reality, you’ll seek and find and the work you really love and build a sustainable career with it.