Can We Revive the Miracle of American Entrepreneurship?

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Can We Revive the Miracle of American Entrepreneurship?

At the start of the 1970s, about 3 percent of U.S. households started a new business every year. By the end of the ‘80s, that rate had increased by a third. By the end of the 90s, it had risen again, by almost a fifth, and stood near 5 percent.

Then, quite abruptly, the growth stalled—and after the Great Recession, the rate fell.

What’s the bottom line? If the trends of the previous 30 years had continued, the nation would have created 1 million more entrepreneurs over the last decade than it actually did!   That’s big news when it comes to explaining underemployment and sub-par economic growth.

Camilo Mondragón-Vélez, a senior research officer at the World Bank Group’s International Finance Corporation, analyzed two long-running data sets and calculated the 1 million missing entrepreneurs figure.1 He attributes the shortfall largely to a sharp decline in entrepreneurship among families earning between $41,000 and $151,000 in today’s dollars. This very broadly defined “middle class” constitutes 60 percent of all business-owning households, but recently showed declining rates of new business ownership after decades of growth.

The analysis was published by the Center for American Progress, a liberal think tank.2 It shows that it now takes would-be entrepreneurs more time, more income, and more education to start a business, compared to previous decades. The average new business owner was 47 years old in 2010, up from 41 in 1970. About two-thirds of those new owners had at least some college education in the 2000s, up from three-fifths in the ‘90s.

The median wealth of a family that was about to start a business was three times higher in 2009 than a comparable family that wasn’t about to start a business. That’s up from two times higher, in the ‘90s.

This decrease in entrepreneurship goes a long way toward explaining the slow recovery in hiring following the recession. Compared with the recovery from the deep downturn of 1981-82, start-up employment grew significantly less in the year following the Great Recession. Analysis by the Fed suggests that in the 12-month period between March 2010 and March 2011, lower employment growth at start-ups may have subtracted as much as 0.7 percentage points from total job growth, translating into roughly 760,000 fewer jobs.3

Fortunately, there are signs that this trend is starting to reverse...

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