A Stronger Economy Means Fewer People Start Businesses

Here’s a counterintuitive finding: As the economy improves, fewer people are starting businesses.

One might think that a healthier economy might draw more people to strike out on their own, but the reality of entrepreneurship is grimmer. People start businesses, it seems, when they can’t get jobs. As the job market improves, the rate at which Americans launch new companies declines. That’s the broad finding of the Kauffman Foundation’s index of entrepreneurial activity, published today, which tracks the percentage of the adult population that start businesses each month.

That trend has been in evidence for years. You can really see it in the construction industry, where swings in new homebuilding appears to have turned construction workers into small business owners and back into employees again.

Kauffman highlighted the shift in motivations for new entrepreneurs in this year’s report. The percentage of startups launched by people coming directly out of unemployment has decreased since the recession.

As entrepreneurs are driven more and more by opportunity, as opposed to necessity, policymakers should shift their focus on easing barriers to growth, says Dane Stangler, a vice president for research at Kauffman. That could include shifting tax policy to lower the costs of adding new employees.

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