Startup Rates Are on the Rebound

Here’s evidence that entrepreneurs have regained some confidence since the Great Recession: More business establishments opened in 2012 than in any year since 2007, according to data published last week by the U.S. Census Bureau. And for the first time since 2008, more businesses entered the economy than exited. The good news was consistent across the country, with all 50 states showing a higher startup rate in 2012.

This isn’t exactly surprising. Lower consumer demand and tighter access to capital (PDF) made the aftermath of the recent recession a hard time to launch a business. But economic cycles can affect entrepreneurship rates in unexpected ways. For example, research from the Kauffman Foundation suggests that workers laid off during the downturn went on to start their own companies.

Over the long term, new companies make up a declining share of the total number of businesses in the U.S. This chart shows how many companies start up or shut down in a given year, as a percentage of all businesses:

Earlier this year, a paper published (PDD) by the Brookings Institution used Census data to suggest that despite the celebration of entrepreneurship in U.S. media and politics, the economy has become less entrepreneurial. That trend is hard to explain. The paper’s authors didn’t pinpoint specific causes, and theories offered in response to the paper—the population has aged out of its entrepreneurial sweet spot; regulations are favoring incumbent firms—aren’t entirely satisfying.

What’s clearer is the impact startups have on employment. In 2012, 5.9 million businesses that were at least a year old added a net of 2.3 million jobs. About 730,000 new establishments hired 5.5 million workers. Not all new companies create jobs at the same rate, but an improving startup rate is probably good for the broader economy.

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