Thursday, June 16, 2011

SuperEntrepreneurs, And how your country can get them.

As you have noticed, postings have been thin lately. The reason is that I am busy writing a book, called "SuperEntrepreneurs, And how your country can get them." I am writing with my brother Nima Sanandaji and with Swedish economist Stefan Fölster.

The book is based on my dissertation. All previous cross-country indices of entrepreneurship to my knowledge have relied on self-employment or measures very similar to self-employment (such as business startups, which is entry into self-employment).

The problem with this is that self-employment is quite different from innovative, high growth entrepreneurship. Policy makers are often more interested in the latter; in having more firms like Google, Microsoft, Wal-Mart and Apple, not more taxi drivers and dentists.

The policies and the institutional environment that fosters innovative entrepreneurship turn out to be quite different from the institutions and policies that drive small-scale self employment. High taxes for example inhibit innovative entrepreneurship, but might even encourage self-employment, since the self-employed can more easily evade taxes.

Similarly, stricter regulations on startups, is associated with more firms. The countries with the highest self-employment rate in the OECD are Greece, Italy, Mexico, South Korea, Turkey and Portugal, all regulated, with low-quality institutions relative the rest of the developed world, and lower per capita income. I argue that this paradoxical result is in part caused by evasion of regulations and in part by dampened competition. In countries with more regulations and worse institutions, it is harder for the best firms to grow rapidly and to absorb and outcompete the least effective firms.

The United States is the world’s most entrepreneurial major economy, with 31 percent of the largest 100 public firms having been created in recent history by entrepreneurs, compared to merely 7 percent in Western Europe. At the same time, the United States has the second lowest self-employment rate among developed countries. Western Europe has twice the self-employment rate of the United States. Similarly the self-employment rate in Silicon Valley is lower than the U.S national average and half that of California.

This book creates the first international index of high-impact entrepreneurship by compiling a comprehensive list of self-made billionaire entrepreneurs during the last two decades, relying on Forbes Magazine's list of billionaires. In this way the world's 1000 or so most successful entrepreneurs are identified in 53 different countries. Entrepreneurship is the most common source of great wealth.

It turns out that 58% of the world’s richest individuals and 65% of America’s richest individuals are self-made entrepreneurs. My idea in picking these measures was simple - since we care about Google, Microsoft, Wal-Mart and Apple whenever we talk about entrepreneurship, and use these firms as archetypes and examples, why not create an empirical measure which corresponds as much as possible with such firms and their creators. Billionaire Entrepreneurs are more common than people realize, which made it possible to create a cross-country index.

In the book we find that institutional quality, property rights protection, tax rates, regulations on startups, financial sophistication and human capital are the most important factors associated with having a high number of SuperEntrepreneurs in your country. We also show that these measures typically are related in an opposite way to self-employment, which may explain why previous studies have struggled with identifying the determinant of entrepreneurship. By contrast many common policies aimed at promoting small business and self-employment seem to have no effect, perhaps in part because small business and self-employment are so different from innovative entrepreneurship.

I discuss this in a paper with Peter Leeson. While weak property rights protection is associated with having fewer billionare entreprenurs, it is associated with having more self-employment.

The book further describes the stories of many of the less well-known SuperEntrepreneurs and their firms. Entrepreneurship is a complex phenomenon, and is better understood and its importance for the economy easier shown when illustrated through examples.

Examples of American firms that appears in our indices of entrepreneurial firms are Intel, Microsoft, Google, Apple, Yahoo, Oracle, Cisco, Sun Microsystems, Bloomberg, PayPal, AOL, Facebook, E-bay, Dell, Hewlett-Packard, Gateway, inc,, Amazon, Wal-Mart, Home Depot, Best Buy, Family-Dollar stores, The GAP, Urban Outfitters, Ralph Lauren, Nike, Trader Joe's, Starbucks, Subway, Blackstone, Bridgewater, KKR, CNN, Fox News, Univision, HBO, The Weather Channel, Black Entertainment Television, DreamWorks, Lucas Arts, Ultimate Fighting Championship, Ty Inc. (Beani Babies), Conair, Enterprise Rent-A-Car, Dolby Laboratories, Bose, University of Phoenix and FedX. Europeans firms include IKEA, Aldi, Zara, H&M, Armani, Benetton, Red Bull GmbH, Virgin group and Ryanair. Other examples are Japanese Sony, Honda and Softbank, Canadians Research in Motion (Blackberry) and Cirque du Soleil, Israeli Check Point Software and Hong Kong's Cathay Pacific Airways.

Now you know what I am doing and why I am not writing much on the blog until the book is done.

Friday, June 3, 2011

Work-sharing is not a solution to the unemployment problem

Among the European left, it is common to demand legislation which mandates that each worker may work maximum 35-hour or even 30-hours per week. The French Socialist President managed to pass this reform a decade or so ago. The idea is that forcing workers to work fewer hours will lead to more jobs for the unemployed, and also that this is good for workers.

One implicit assumption here is that workers do not know their own best or have no power over hours worked, and prefer the government force them to work less. Another assumptions underlying this view is that jobs are like stones on the ground or chairs around a table, there is a fix number of jobs in the economy (exogenously determined, somehow), and if one person works more, someone has to work less.

In fact other than the extreme short run and during periods of economic crisis, this view is wrong. Economists view jobs as a matching of a resource (time and knowledge of the worker) with a firm which demand this resource to produce things. This is why we don't observe a bigger population causing higher unemployment.

The French experiment with 35 hours workweek was therefore doomed to fail, since it ignored fundamental economics. In fact this is exactly what happened. Unemployment did not decrease, employment did not increase, firms had all sorts of problems, and the reform was ultimately abandoned.

The Swedish left has learned nothing from the French failure. Consequently the envirimentalist Green Party and the leftist Socialist party still demand that the government forces workers to work fewer hours, promising that this will lower unemployment.

To evaluate this claim, let us graph average hours worked per worker and the unemployment rate among developed OECD countries. I look at 2007 before the crisis, although the results are identical if we pool 1997-2007 to get rid of some of the business cycle.

As you see, there is no relationship whatsoever between unemployment and average hours worked. Germany, France and Belgium with their short workweeks and long vacations have high unemployment.

Countries with many hours worked, such as the United States and Japan have comparatively low unemployment (remember this is before the crisis). One thing that may surprise readers is that workers in Italy and Greece work lots of hours. I have seen the same phenomenon elsewhere. What you have to remember is that this is hours worked for those who work. Greece and Italy have lots of people (mostly women) out of the labor market, but those who have jobs work long hours. Furthermore, these are comparatively poor countries, and workers in poor countries tend to work more hours, because they value money over time.

The demand for fewer hours pushed by unions in Europe is to large extent a result of extremely high marginal taxes, rather than reflection of the true wishes of the workers. If you only get to keep 35% of a negotiated wage increase, but 100% of more vacation days, the choice may be different than what the worker would do in an undistorted economy where he got to keep everything he earned.

I know this is a provocative statement for many, but because of high taxes, I believe many Swedes if given the choice would actually prefer to get 10-20.000 kroner ($1100-2200) in their pockets than have one additional vacation week. This is approximately the true full economic cost of the vacation for a typical worker, of course higher still for a high-skill worker.

Since we are on the subject, let me point out that the often heard claim that Americans only have 2 weeks of vacation is a myth. According to calculations by Harvard professors Alberto Alesina and Edward Glaeser, Americans on average take 3.9 weeks of vacation per year.

The Green party is wrong that their reform would lower unemployment. They are however honest and acknowledge that reducing hours worked would lower income and tax revenue. However some in the European left -including the Swedish Socialist party - promises voters that Sweden can go from a 40 hours to 30-hours workweek without any wage cuts! Even before I went to college to study economics I remember I found this claim absurd, a sign that the extreme left in Europe lacks economic common sense.

Income comes from production. How can society cut hours worked by 20-25% without lowering production? The left argues that this can be done by lowering firm profits.

Even disregarding the fact that cutting hours worked would lead to less investment and capital moving out of the country, firm profits are too small to finance the utopia of socialists. In Sweden, as well as the United States, total corporate profits are only about 10% of GDP, and therefore not enough to finance such a reform. In addition, if production goes down tax revenue will also go down, hurting the poor.

Lowering hours worked is sometimes popular among workers, although decreasingly so in Sweden with the increasing realization among the public that the Swedish economy has too few hours, not too many. The popularity of cutting hours has been taken as evidence that this is a good reform. However, when polled, people are simply asked if they would enjoy work fewer hours, whereas the correct question should be “would you want to work fewer hours and have your wage cut dramatically?”.

This is a version of the Fiscal Connection, good poll questions should explicitly link costs-with benefits of the choice asked about, because ordinary people will usually not make the connection themselves.
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