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Entrepreneurs are Weakening as Job Creators, But Don't Blame Washington

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Hiring by the nation’s entrepreneurs is down.

While that point will surprise few people who lived through the Great Recession and the weak recovery that followed, the duration of the trend probably will. Government data sources point to a more than three-decade-long decline, going back to when data were first collected in the late 1970s.

Small businesses have been adding employees at a slower rate than big businesses for the past two decades. Between 1990 and 2011, employment in businesses with fewer than 500 workers grew by 13.3 percent, while employment in companies with 500 or more people on the payroll increased by 28.6 percent.

This faster rate of employment growth at big businesses has led the small-business share of private-sector employment to shrink over the past nearly two-and-a-half decades. In 1988, businesses with fewer than 500 employees accounted for the majority (54.5 percent) of private-sector workers. In 2011, small businesses were responsible for a minority of private-sector jobs (48.5 percent).

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Not only have existing small businesses been adding workers at a slower rate than big businesses in recent decades, but also Americans have been founding new companies with employees at a substantially lower rate than they did three-and-a-half decades ago. Drawing on the Census Bureau’s Business Dynamics Statistics (BDS) database, researchers affiliated with the Brookings Institution recently showed that the rate of new employer firm formation in 2011 was roughly half of what it was in 1977 – a pattern the authors found was present across most industries and metropolitan areas.

While Americans are no longer creating and running small businesses with employees at the same rate they once did, they are starting and managing businesses without employees at a higher rate. Between 1992 and 2011, the per-capita number of employer businesses in the United States declined by 7.3 percent, while the per-capita number of non-employer businesses increased by 30.5 percent, Census data reveal. As a result, the fraction of American businesses with employees shrank from 26.2 percent in 1992 to 20.2 percent in 2011.

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New businesses have become a less important source of job creation than they were three-and-a-half decades ago. Census data indicate that new-business job creation has fallen even faster than the rate of new-employer firm formation, as the number of people working at the average startup has declined along with the pace of creation of new employers. These two trends have combined to push the new-firm share of employment down from 5.7 percent in 1977 to 2.0 percent in 2011.

Self-employed people are less likely to hire other people than they once did, labor market data reveal. Bureau of Labor Statistics (BLS) figures show that the share of self-employed Americans with employees fell from 20.7 percent in 1995 to 13.8 percent in 2010.

Many in Washington will likely point to the other side’s policies as the cause of the decline in small- and new-business job creation. But differences between the political parties in their approach to entrepreneurship and small business aren’t the most likely explanation. The downward trend has persisted for more than 30 years – through Democratic and Republican administrations, and through a wide variety of conflicting government policies. While government actions might have exacerbated or ameliorated the downward trend over the years, something more fundamental than government action is responsible for the long term decline. The $64,000 question is: What’s driving the change?

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Scott Shane

Written By

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).