Why Rates of Entrepreneurship Remain Depressed

Because of a range of factors, those looking for a rebound in entrepreneurship have a long wait.

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By Scott Shane


Opinions expressed by Entrepreneur contributors are their own.

Five-and-a-half years into the economic recovery and we are still looking for the rebound in startup activity that usually accompanies an expansion. Examination of the factors at work suggests that we have longer to wait.

The most recent Bureau of Labor Statistics numbers show that the fraction of the civilian, non-institutionalized population that is self-employed and running a corporation (incorporated self-employment) was 5.1 percent below its level five years ago, when the current economic recovery was getting underway. Because rates of entrepreneurship fell significantly during the Great Recession, the per-capita rate of incorporated self-employment is currently 11.2 percent below where it was in October 2007.

Economic theory suggests that we should have seen a rebound in entrepreneurial activity by now. When the economy expands, sales at existing businesses increase, causing their profits to rise. Rising profits, in turn, reduce the business-failure rate and stimulate would-be entrepreneurs to enter the market. Together a declining exit rate and a rising entry rate should increase the self-employed fraction of the population.

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That's what happened at the end of the 2001 recession. Between October 2001 and October 2007, the per-capita rate of incorporated self-employment increased by 16.7 percent as the economy expanded.

But this time, things are different. Even though surveys and government data both indicate that sales and profits at small businesses have improved substantially over the past five-and-a-half years, we haven't seen a rebound in entrepreneurship.

The reasons are four-fold: structural changes in the American economy have triggered a long term downward trend in entrepreneurial activity; changes in the banking system have made small business credit more difficult to get; a post-recession shift in attitudes has made Americans less interested in striking out on their own; and a shift in government policies has made entrepreneurship more challenging to undertake.

As I have written about before, the rate at which Americans start new companies has been on a downward trajectory since the late 1970s, driven by changing industry composition and the growth of multi-outlet businesses like Starbucks and Walmart. These structural factors have counteracted the cyclical boost in entrepreneurship that usually comes from an economic recovery.

Related: Entrepreneurship Doesn't Cause Per-Capita Income Growth

A tightening of bank lending standards and a drying up of the home-equity-loan market in the post-financial crisis era have made small business credit less available than it used to be. The value of commercial and industrial loans of less than $1 million – a common proxy for small business lending – was 17 percent lower in June of this year than it was at the beginning of the recovery – when measured in inflation adjusted terms. The fraction of small business owners reporting that obtaining capital was easy was 18 percentage points lower last quarter than in the quarter when the Great Recession began and only 6 percentage points higher than when the current economic expansion started.

As I have explained elsewhere, many of the policies put in place by the Federal government since the election of President Obama in 2008 – banking reform, business regulation, tax policies, and the Affordable Care Act to name a few – have made entrepreneurship more difficult to undertake.

Since these four factors are unlikely to change anytime soon, those looking for a rebound in start-up activity have a long wait ahead of them.

Related: The Legacy of Communism Still Influences Beliefs About Entrepreneurship

Scott Shane

Professor at Case Western Reserve University

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).

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