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Fortunately, Americans are Becoming Less Likely to Start Businesses

The proportion of the U.S. population that is starting businesses is shrinking. Data from the Federal Reserve show that the proportion of America households that own a business declined from 14.2 percent in 1983 to 11.5 percent in 2004.

Data from the Small Business Administration shows that, on a per capita basis, the number of people starting companies that employ at least one person is lower today than it was in the early 1980s. And data from the Bureau of Labor Statistics shows that the proportion of the population outside agriculture that works for him or herself is only 58 percent of what it was in 1948.

The data make very clear that American’s are becoming less and less likely to start businesses every year. That’s a fact.

 

It’s also good news. Having fewer entrepreneurs means that we are experiencing economic growth. The more developed a country is, the fewer people work for themselves. And when the effect of the number of entrepreneurs is isolated from other factors, the evidence shows that increases in the number of people running their own businesses leads to reduced GDP growth.

Why? Much entrepreneurship is about necessity – not having a good job to take – so if we have a vibrant economy generating a lot of good jobs, we have fewer people starting companies.

Also, when companies grow in size, they usually get more efficient. They can buy in larger volume, and take advantage of economies of scale. Think of it as the Wal-Mart effect. One Wal-Mart replaces a lot of entrepreneurs – the independent grocery, jeweler, appliance store, garden shop etc… So if we are able to create more high growth companies like Wal-Mart than we used to, we don’t need as many independent entrepreneurs.

So, over time, a smaller and smaller portion of the U.S. population goes into business for themselves…and that’s a good thing.

Don’t believe the myths, know the reality.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of seven books, the latest of which is Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By [1]. He is also a member of the Northcoast Angel Fund in the Cleveland area and is always interested in hearing about great start-ups. Take the entrepreneurship quiz.