Fewer and Less Skilled? Human Capital, Competition, and Entrepreneurial Success in Manufacturing

Young firms are considered to be the engines of growth and dynamism in an economy and the United States has long been considered to be a nation of entrepreneurs with the best institutions for young firms to flourish. Recently however, there has been mounting anecdotal evidence and academic research to show that the rate of entrepreneurial entry in the U.S. has been declining over time and that young firms are no longer generating substantial new jobs. Largely missing from this debate is an evaluation of whether the decline in entrepreneurship rates is accompanied by a change in the skill type of entrepreneurs and whether this has long-term consequences.

In this paper, we use establishment level micro-data from a panel of large-scale surveys conducted by the Bureau of Labor Statistics (BLS) of the skills of employees in over 800 occupations in start-ups and incumbent manufacturing firms in the U.S. Using over 3 million establishment-occupation level observations, we seek to answer the following questions:

1. How have entry rates and the quality of entrepreneurship changed in manufacturing? Has there been a decline in high-skilled versus low-skilled entrepreneurs or are entrepreneurship levels declining across all skill types?
2. Are there long-term consequences of initial skill at entry: both in the growth rates of entrants and in their subsequent intellectual capital?
3. How does entrants’ human capital and growth change in response to competitive trade shocks? How do entrants and incumbents compare in their response?

We show that over the 2005-2013 period there is a decline not only in the number of new businesses in US manufacturing, but also in their size and  quality, measured by the tasks which their workforce performs. Entrants on average are performing higher proportion of routine manual tasks and lower proportion of tasks that require high cognitive skills such as complex problem solving as seen in Figure 1.

This has significant long-term consequences because we show that the founding stock of human capital in entrants is predictive of their future human capital as well as growth rates over the early life cycle. The incumbent firms on the other hand do not show the same decline in average skill and there is some evidence to suggest that incumbents are becoming less engaged in routine manual tasks. The differences between incumbents and entrants are growing over time.

The contrast between entrants and incumbents is most stark in their reactions to a competitive threat from Chinese imports.  While incumbent firms upgrade their human capital in response to increased competition, the quality of the entrants is minimally affected.  As the level of imports increases, more skilled incumbents grow faster than incumbents with lower skills.  While these competitive effects on skills are economically significant, the skill differential between entrants and incumbents would exist even with a total cessation in imports as seen in Figure 2. Thus, the decline in entrepreneurial quality in U.S. manufacturing is only partially responsive to the level of Chinese imports into the country.

Our findings are consistent with technological polarization, whereby incumbent firms upgrade their human capital, and entrepreneurial firms are finding investment opportunities in niches employing less skilled labor. This polarization is particularly stark in industries facing import competition where incumbents are upgrading their human capital most, both in their legacy plants and in the new plants they construct.