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How Young Adults Can Jumpstart the Economy

 This post also appeared on the HuffPost Business site.

Amidst this tough economy, and perhaps because of it, many young people are trying something bold: they’re starting a business. Where there are no jobs to be found, and the unemployment rate for young adults is astronomical, these new businesses can create jobs, spur innovation, and grow our economy.

The idea of youth entrepreneurship is sexy, and the Obama administration, among others, is rightly spotlighting the potential for economic growth through young, innovative talent, recently hosting a summit to hear directly from young entrepreneurs themselves how to foster new businesses and remove barriers to entry.

The summit is a smart first step to bringing more attention and study to a potentially transformative movement of young people creating businesses. But the idea isn’t new and it isn’t partisan. It reflects our American passion for big thinkers and risk-takers. Many see the facilitation of entrepreneurial activity as a rare opportunity for aisle-crossing in Washington. And there are high hopes placed on a younger generation that understands online markets and technology.

Yet we need to ensure that “youth entrepreneurship” isn’t just another buzz word thrown around in DC, but a real possibility for those who want to pursue it. We need to acknowledge that fact that 1) many young people want to start a business but face ever increasing economic pressures, 2) less young people are starting businesses in this economy, and 3) the types of businesses they start in the Recession are going to be harder to sustain. And then we need to craft policies that allow Millennials to pursue their dreams to start a business, even during this tough economy, and that eliminate any barriers that may stand in the way of those businesses becoming successful.

Indeed, despite the stereotypes of unmotivated young people, a surprisingly high number of teenagers see entrepreneurial activity in their future. According to the Kauffman survey, 39 percent show interest in starting a business, and that number actually goes up as youngsters start to hit their 20s. Starting a business is an American dream for many Millennials.

But who is actually following that dream during these dark economic times? That’s a more complex question. One measure of individual entrepreneurship done by the Global Entrepreneurship Monitor states that start-ups have been in decline for the past five years, dropping from 10.6 percent in 2005 to 6.9 percent in 2009. Importantly, the percentage of entrepreneurial activity engaged in by younger generations declined in that timeframe, while entrepreneurial activity for older generations increased. Another measure of entrepreneurial activity, the Kauffman Index, shows an increase in overall entrepreneurial activity, but still shows a slight decrease in youth entrepreneurialism. In other words, young people want to start businesses, but less of them are getting that chance right now.

The story becomes more complicated when we look at the types of enterprises formed by those who actually are setting up shop these days. When there are higher rates of unemployment, youth in particular are more likely to go into “necessity entrepreneurship,” rather than “opportunity” entrepreneurship. In other words, more young adults decide to start some sort of a business during a recession because they need the income to eat and pay the rent, not because they find a gap in a market that they think they can fill with an innovative idea. This makes sense. Young adults have little capital or experience, and are the first fired during tough economic times. By starting a business, young people are simply being resourceful.

This trend toward necessity entrepreneurship is particularly prevalent when the cohort faces sustained high unemployment — in other words, the precise situation Millennials find themselves in right now. But while necessity entrepreneurs are more common, they also, predictably, have lower initial earnings, less growth, and fail more often. Moreover, businesses started during a recession see lower earnings, even long after the recession. Unsurprisingly, most businesses started by young adults are not Facebook and are not going to attract large venture capital firms. These businesses start small, local, and can potentially create real jobs in their community. Unfortunately, the constraints that youth entrepreneurs face in today’s markets make it more difficult for them to be successful.

This is precisely why we need the aforementioned buzz, in order to generate policies that will encourage more young adults to pursue their entrepreneurial dreams, and to enable young “necessity” entrepreneurs already struggling to become as successful as the more commonly lauded “opportunity” entrepreneurs. These policies need to address a number of questions.

How do we lower the barriers to success for all types of young entrepreneurs and companies, from the new bar down the street to the next Internet powerhouse? How do we address the access to capital problem for young adults with debt and little credit history? What small business loan policies and educational curriculum need improvement, and what training need be made available? What incentives need to be structured to turn today’s unemployed Millennials searching for a way to make rent into tomorrow’s leading innovators?

A concerted effort on behalf of all parties to find these answers will help put young people back to work, allow young adults their chance at their American dream, and create jobs in a struggling economy.