The Entrepreneurial Malaise

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The Entrepreneurial Malaise

Entrepreneurs have always been vital to America's economy, not just for the products they create, but for the jobs they create. According to a study by the Ewing Marion Kauffman Foundation, over the past 30 years, companies that were less than five years old accounted for nearly 100% of the net job growth in the United States.1 According to the U.S. Small Business Administration (SBA), small businesses currently employ about 50 percent of all private-sector employees.

Unfortunately, the number of new businesses being created is shrinking dramatically. About 700,000 new businesses were started each year during the last decade, but today the number has dropped to roughly 500,000 per year.2

As a result, according to Kauffman, only about 35 percent of companies in the U.S. are less than five years old today, compared to half of all firms in 1980.

To put it another way, consider the proportion of new employer businesses that are started each year relative to the size of the population. Employer businesses are those with at least one paid employee; that eliminates independent contractors and freelancers who work for themselves. In 1977, more than 35 new employer businesses were started for every 10,000 Americans aged 16 and older. In 2009, that number had been cut in half, to 18.3

There are many likely causes of the decline in entrepreneurship, but three clearly stand out as the biggest contributors to this crisis:

  • The first obstacle to starting a business is the weak economy. With consumer confidence and spending down, it's logical for would-be entrepreneurs to take a more cautious approach than they would during a boom. For example, a Kauffman survey in January 2010 found that 71 percent of entrepreneurs did not expect to create new jobs during the year, with more than one-third blaming the poor economy.4
  • The second obstacle is high unemployment. According to the U.S. Bureau of Labor Statistics, 11.7 million Americans were unemployed in March 2013.5 Other studies suggest that when the number of people who have settled for lower-paying jobs is factored in, 23 million people in the U.S. are "underemployed." While this might seem like an incentive for entrepreneurs to start a business — because they have access to a larger pool of workers, who theoretically will work for lower wages — high unemployment actually acts as a disincentive. Why? Because entrepreneurs know that if their businesses fail, they have no "Plan B." They can't simply close a poorly performing business and take a job at a corporation because very few positions are available, and there will be many applicants for each opening...

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