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Entrepreneurship is still strong, for better or worse

Author: Austin Nichols

| Posted: May 28th, 2014

Recent rumors of the death of entrepreneurship have been exaggerations. But entrepreneurship has shifted from new firm creation toward workers going it alone: the ratio of nonemployer businesses to workers shot up from 14 percent in 2000 to 18 percent in 2011. This trend will likely lower upward mobility in the future because, in the long run, workers in a family business tend to do better than regular wage and salary workers, but the self-employed tend to do worse.

Entrepreneurship in the Business Employment Dynamics data is new firms per thousand workers, not including self-employed people, measuring “entrepreneurship at the stage where startup businesses begin to hire employees.” That rate was around six per year in the 1980s, around five in the 1990s, and around four more recently.

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New firms have been on the decline, as a fraction of all firms for the past 30 years in the Business Dynamics Statistics, but the rate at which new firms are closing in the first year has also fallen. The ratio of new firms opening each year to the prior year’s crop of new firms closing has hovered around four for most of the past three decades, with one very bad year in 2009, and an uptick since then. About three in four firms make it past the first year and two in three survive more than two years. This pattern has stayed true across the decades. The arrival and exit rates of firms have been pretty stable, but the stock of firms has gotten bigger, and firms themselves have grown in size, as smaller employers accounted for more job loss.

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On the other hand, the number of nonemployer businesses has grown tremendously over the past 15 years. The vast majority, 86 to 88 percent, of those businesses are sole proprietorships, and the rest are evenly divided among corporations and partnerships. Unfortunately, many of those sole proprietors will not fare as well as their employed counterparts, if past experience is any guide. Some of the growth in nonemployer businesses is due to the past two recessions, their jobless recoveries, and the recent surge in long-term unemployment. A worker discouraged from a long search for a wage and salary job may take up self-employment as a last resort.

This adds to a longstanding trend of more workers with nonstandard or alternative work arrangements like contract workers getting 1099s instead of W-2s at the end of the year. With fewer employment protections and benefits, these workers are on the losing end of a large-scale shift of risk from large institutions (employers and governments) to workers, which has so far been good for American business but bad for the American worker.

With their higher income risk, many of those same workers may also get a shock when it comes time to reconcile their health insurance subsidies in 2015, unless state governments step up and provide solutions that Washington cannot deliver in its current political stalemate.

Filed under: Economic Growth and Productivity, Employment and income data, Job Market and Labor Force, Labor force, Wages and nonwage compensation, Workforce development, training, and opportunity |Tags:
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