Measuring entrepreneurship is a more complicated endeavor than it may first appear.
Is American entrepreneurship in decline? Data shows that there are fewer startups, which suggests that it is. However, that isn’t the whole picture.
If new jobs are an indication, entrepreneurship is on the decline. The Bureau of Labor Statistics (BLS) measures new startups (businesses under a year old) by new jobs created. More new jobs at startups equates to more startups.
According to the BLS, startups created 4 million jobs in 1994. Startups created 3 million jobs in 2015.
Not only that, but companies with less than 250 employees have seen their share of the employment pie get smaller since the early 1990s. Meanwhile, companies with more than 250 employees have seen their share of the employment pie get larger.
Historically, startups create more jobs than mature companies. Startups account for almost every new job in the United States, adding new jobs at a higher rate than removing them. Mature companies, by comparison, tend to add and remove jobs at about the same rate.
Moreover, startups continue to add jobs during economic downturns, while mature companies tend to add and remove jobs in tandem with economic growth and decline.
Falling Business Dynamism
Companies come and go. Economists refer to their inceptions as births and their closures as deaths.
Business deaths are now outpacing business births for the first time since economists began collecting data in the late 1970s.
Business dynamism and entrepreneurship are experiencing a troubling secular decline in the United States. Existing research and a cursory review of broad data aggregates show that the decline in dynamism hasn’t been isolated to particular industrial sectors and firm sizes.
The decline in entrepreneurship and business dynamism has been nearly universal geographically the last three decades—reaching all fifty states and all but a few metropolitan areas.
… [One indicator] is business consolidation—a measure of economic activity occurring in businesses with more than one establishment. In previous research, we documented a pervasive increase in business consolidation across geographies and sectors during the last few decades…Here, we are able to link it with declines in firm formation.
More Chain Stores
Chain stores are continuing to grow every year. As they do, they crowd out smaller and newer businesses.
The days of the local Mom and Pop store are on the decline, for better or worse. The competition is fierce, and it’s far more likely to see a new Starbucks appear on the corner than a new, one-off coffee shop.
Long-established companies represent an increasingly large share of U.S. firms, with those that have been in business for more than five years now accounting for more than two-thirds of companies.
Meanwhile, the proportion of companies of every age from one to five years old has shrunk over the past 35 years. Older firms now represent the vast majority of U.S. companies.
…Not surprisingly, fewer new businesses means fewer new jobs. [Moody’s Chief Economist Mark] Zandi cited Labor Department statistics showing that companies less than one year old contributed 5.2 million jobs in the year ending June 2014, down from the usual 6 million or so they generated in the years leading up to the recession and well off the normal pace of 7 million to 7.5 million jobs a year seen in the 1990s.
“We’re getting less bang from our fast-growing companies,” said Wendy Guillies, Kauffman’s acting president. Echoing Zandi, she added: “I know the headlines look good, but when you dig a little deeper, something’s not quite right.”
One interesting dynamic is the increase in freelancers in the workforce. Although technically not startups, freelancers are a form of new business. Yet their numbers don’t typically find their way into the measurements.
Many don’t declare themselves a startup until they’ve been at it for months or even years. Also, many never turn their freelancing gig into a startup. They may have chosen to freelance because of the particular lifestyle and independence it affords them. It’s an end goal rather than a step on the way to a startup.
Fewer Companies, Less Churn
Churn is the word economists use for the positive shuffling around of workers from company to company.
Churn is a mechanism by which labor markets reallocate workers towards more efficient ends. In the typical job-to-job move (that is, without any intervening stint of unemployment), an American worker can expect a rise in wages of over 8%.
This gain represents, at least in part, an improvement in productivity. As workers obtain skills and find better job matches, their output and earnings rise. And as firms obtain ever more suitable labor, they can afford to pay higher wages. In this way, the churning of the labor market contributes to growth in the potential output of the economy.
When times are good, churn is higher. Companies are hiring, there are more jobs out there and workers are more likely to switch jobs.
While there’s always a risk with startups, the risk is less when the economy is booming. Employees at big companies are more willing to roll the dice on a startup becoming the next Google or Facebook.
In times of economic downturn, workers are just thankful they have jobs. Employees at mature, stable companies are less likely to leave those companies, especially for startups. The labor force stagnates.
Something similar occurs when there are fewer startups in the marketplace. There simply aren’t as many opportunities at startups as there are at mature companies, so more of the labor force works at mature companies. Again, the labor force stagnates.
Is Entrepreneurship in Decline?
It’s a complicated question with a lot of nuance and many variables, including employment numbers, business births and deaths, the rise of chain stores, the freelance market and business churn.
However, the short answer is yes. Entrepreneurship, by most metrics, is on the decline in the United States and has been for the last 30 to 40 years.