Why Entrepreneurship Is Declining

Photograph by Thomas Barwick/Stone/Getty Images

The startup rate for new businesses declined in 2011 and new entrepreneurs were more likely to go it alone than hire employees, new data from the Kauffman Index of Entrepreneurial Activity show. The annual survey, released this week by the private, nonpartisan Ewing Marion Kauffman Foundation, showed a 5.9 percent drop from 2010 to 2011, with approximately 543,000 new businesses created in the U.S. each month last year. Even with the drop, the level of entrepreneurship in 2011 is among the highest during the past 16 years. I spoke recently with Kauffman researcher E.J. Reedy, who worked on the study. Edited excerpts of our conversation follow.

Your data show a decline in the startup rate in 2011 but it’s still elevated compared to what it was before the recession, is that right?

Business creation over the past four years has been higher than average, given what we have seen since we started the survey in 1996. However, from 2007 to 2010, the rate at which individuals established new firms with employees declined. In 2009, it was at an all-time low. The rate remained flat from 2010 to 2011.

So we’ve got a tale of ups and downs: Self-employment is near all-time highs, but larger business starts still haven’t recovered from before the recession.

Why do you think that is?

People entering self-employment are probably using it to meet personal needs, which is not surprising in a down economy. But they are not creating businesses that will be growth-oriented and employ many others.

Where do you get the data for your study?

We look at the government’s Current Population Survey, which is collected jointly by the U.S. Census Bureau and the Bureau of Labor Statistics. What we analyze is the percentage of adults who report that they have started a business in a given month.

So you’re getting a pretty broad measure that includes people who have become self-employed and those starting businesses with employees?

Yes. The key thing is they have to work more than 15 hours on entrepreneurial activity in a given week. We try to screen out people who are pursuing a hobby.

Your data break down the demographics of entrepreneurship. Who is most likely to become an entrepreneur?

Essentially, since we’ve been monitoring these data, new entrepreneurs have become more Latino, older, and more likely to be immigrants. Immigrants are now twice as likely as non-immigrants to report being entrepreneurs, and it’s been during the recession that those numbers have really taken off.

Yet entrepreneurship rates for all races and ethnicities declined from 2010 to 2011, according to your report.

That’s true, but the Latino business-creation rate remained at a high level relative to previous years and other demographic groups. Latinos have gone from making up about 10 percent of all new entrepreneurs in 1996 to 22.9 percent in 2011. The increase seems pretty consistent over time, rather than a one-time blip.

When we look at the 15 largest metropolitan areas, Los Angeles had the highest entrepreneurial rate in 2011, which may be due to the large populations of Latinos and immigrants.

The other demographic factor that stands out is age, with older people now more likely to be entrepreneurial than they were pre-recession.

Older age groups have trended up a little bit in our survey, though their rates of entrepreneurship have been relatively steady over the past three to four years. In our 2011 data, 45- to 54-year-olds had the highest propensity for entrepreneurship.

Other reports have shown younger people less likely to try entrepreneurship. Did your survey bear that out?

What stands out in our surveys is that 20- to 34-year-olds have a much lower propensity to become entrepreneurs. But they have been the least likely age group to go into entrepreneurship since our survey started in 1996. That may be because the average entrepreneur reports having 10 to 12 years of experience working in industry.

What group among the demographic niches that you study seems to have been affected most by the recession?

The entrepreneurship activity rate among the least-educated group, which are high school dropouts, remains significantly higher than for other educational levels. They’re definitely the group that has changed the most during the recession. Their entrepreneurship rates started going up in 2006 and they’ve been elevated ever since, though their rate of entrepreneurial activity decreased from 2010 to 2011.

This is the demographic that has the least job security right now, so it’s likely they’re being forced into entrepreneurship more than other people.

Your findings showing entrepreneurship rates declining in 2011 seem to directly contradict the findings of a different study, done by the Global Entrepreneurship Monitor, that showed entrepreneurship rates in the U.S. increasing in 2011. How do you explain that?

The GEM data use much smaller numbers in terms of sample size and they are measuring something a little different than we are. But we haven’t seen any spike like that in our data or elsewhere. I think that study was kind of an outlier.

Before it's here, it's on the Bloomberg Terminal.