Problems that Began Long Before the Recession Started

Myth: Entrepreneurship in the United States was trending upward before the Great Recession.

Reality: Many people believe that start-up activity in the United States will rebound once the effects of the Great Recession have worked their way out of the economic system. But a careful look at the data suggests that the recession was not the cause of much of the current drop in entrepreneurial activity. While the recession certainly didn’t help matters any, downward trends in several key measures were visible well before the recession got under way.

In an article published in Monthly Labor Review Akbar Sadeghi of the Bureau of Labor Statistics (BLS) reports on trends in start-up activity from a look at his organization’s data – some of the best available on entrepreneurial activity in America. His article highlights three disturbing trends in entrepreneurial activity that preceded the start of the recession.

First, the rate of new business creation has been on a downward trend in the United States for over a decade. Even before the recession began, the rate of firm formation was substantially lower than it was in the mid-1990s. As the BLS data show, in the first quarter of 2007, the rate of firm formation per 1,000 people in the labor force was only 83 percent of its level in the fourth quarter of 1996.

Moreover, this problem isn’t isolated to certain industries or segments of the economy. As Sadeghi explains, “[firm] birth rates have been on a downward trend across all industries.” Overall, across all sectors of the economy, Americans were less entrepreneurial at the beginning of 2007 than they were in the mid 1990s.

Second, the start-ups that Americans are creating have become less substantial. The BLS data show that the number of employees in the average start-up has been shrinking for years. Even as Americans are founding businesses at a lower rate than they used to, the size of the businesses that they start have become smaller. So we are experiencing a double whammy of a smaller rate of start-up creation and a smaller number of people being hired into the companies that are being started.

Third, new businesses have been weakening as job creators. As Sadeghi explains, “the number of jobs created by openings and births has trended downward since the first quarter of 1998.” Because Americans are creating fewer new businesses at a lower rate than before and the businesses they have been founding are smaller, it’s not surprising that job creation by new businesses has been shrinking.

Given the high rates of unemployment that we are currently facing, the weakening job creation activity of new businesses is alarming. We need entrepreneurs to found businesses and create jobs for the large number of people who are currently out of work. But the pre-recession patterns suggest that America’s entrepreneurs will contribute less to generating new jobs than they did in previous economic recoveries even if we fix the problems in the entrepreneurial sector caused by the recession.