How Immigration Reform Affects Falling Startup Rates

Photograph by John Moore/Getty Images

Don’t let all those high-profile startups fool you: U.S. entrepreneurship is in the midst of a three-decade-long decline. Since the late 1970s, the rate at which new firms entered the economy decreased, while the rate of exits rose. This matters to economists, because new firms—especially those that are growing at a fast pace—are responsible for a lot of job growth.

Observing a trend is generally easier than explaining it. Now, Ian Hathaway and Robert Litan, a pair of economists who have been documenting the decline of U.S. startup rates in a series of papers, have come up with a simple (if partial) explanation: Population growth has slowed.

In a paper published by the Brookings Institution yesterday, the economists point to regional population trends in the late 1970s to make their case. Populations grew in the West, Southwest, and Southeast throughout much of the period from 1950 to 1980, Litan and Hathaway write, while population growth in the East, Northeast, and Midwest was in steady, and sometimes sharp, decline.

The Bureau of Labor Statistics didn’t start tracking business formations until the late 1970s, but the data are striking. Between 1978 and 1980, the 23 states with the highest business formation rates were either West of the Mississippi River or South of the Mason-Dixon Line. Here’s Hathaway and Litan’s map:

This is fairly intuitive. A bigger population needs more homebuilders, supermarkets, and gas stations, and those businesses need suppliers and other service providers like lawyers and tax preparers. The broad increase in the number of businesses will also occasionally breed another type of firm: the high-growth business that goes from zero employees to thousands in a short period of time.

If entrepreneurship rates are tied to population growth, and population growth is slowing down, what can policymakers do? Economists point out that American fertility rates are too low to reverse population trends by making babies alone. In an op-ed published by Fortune, Hathaway and Litan argue that “the only other sure way to boost our work force is through more legal immigrants.”

As far as that goes, President Obama’s speech on immigration is instructive. Obama announced a series of executive actions that will allow about 4 million immigrants to work legally, and shield another 1 million people from deportation. Thrusting those workers into the formal economy has the potential to boost startup rates, Hathaway says in an interview, creating greater demand for the goods and services new businesses sell. But the fact that the president bypassed Congress to act on immigration says a lot about the potential for a broader shift in policy: It will have to wait.