Did the Entrepreneurship Exit Rate Surge in 2011?

Several commentators have recently highlighted the Global Entrepreneurship Monitor’s finding that the share of U.S adults starting or running a new business increased by 60 percent from 2010 to 2011. While I understand the desire to focus on the positive after so many years of declining entrepreneurial activity in the United States, I’m not sure the GEM results really signal good news about entrepreneurship.

down the drain

To see why requires an understanding of the difference between the stock of entrepreneurs and the flow into entrepreneurship. Think of entrepreneurship like a bathtub of water. The stock of entrepreneurs is akin to the level of water the in the tub. The flow into entrepreneurship is similar to the amount of water coming through the faucet. Unmeasured in this analogy is the flow out of entrepreneurship, which is like the amount of water going down the drain.

The GEM report indicates that America opened up the entrepreneurship valve on the faucet. Inflow increased by 60 percent from 2010 to 2011. But the Bureau of Labor Statistics (BLS) data says the amount of entrepreneurship in the tub went down. The government agency reported a 2 percent decline in the share of the labor force working for themselves from 2010 to 2011, following an 8.5 percent drop in the self-employment rate between 2006 and 2010.

There’s only one way to reconcile a big jump in the number of people going into business for themselves with a continued decline in the number of people in business for themselves. That’s an increase in the number of people who ran their own companies leaving self-employment. Like the bathtub, we can’t have more water flowing out of the faucet, but a lower water level in the tub, unless more water is going down the drain.

I don’t think we should celebrate the increase in the number of people entering entrepreneurship in 2011. This rise must have been accompanied by an even greater rise in the number of people exiting entrepreneurship.

Drain Photo via Shutterstock

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

7 Reactions
  1. Nice point Shane. I’m also fascinated with the relationship between the 2008 US census data of total 27.3m US businesses and the few companies – 635,000 that employ more than 19 people.

    • Ian, there’s probably no way of knowing this but it sure would be interesting to know how many of the 635,000 are franchises vs. non-franchises. Also interesting would be a breakdown of small businesses, middle market companies, and large corporations so we could better understand how the 635,000 pie is split up based on overall size of eacho of those companies.

  2. Interesting comparison and article, thanks. I hope to see entrepreneurship rise as the years go on.

  3. Thanks for the data, Scott.

    Another way to look at it…in the form of a question perhaps;

    Could the outflow have been less if more people were actually ready for the rigors of entrepreneurship–of self-employment?

    The Franchise King®

  4. Excelent point Joel. I think a majority of people who start their own business are ill prepared for it, despite the abundant amount of free advice available today. That and the lack of persistence I see in our youth today. Too many “pie in the sky” offers you see everywhere.

  5. Great information Shane. Thanks for sharing. “Context” is so important…the headlines sound great but the rest of the story is important too. Ian’s comments are also interesting that only 635,000 out of over 27 million businesses employ more than 19 people. Is it possible that the faucet is adding more qualified ‘treps while the drain is releasing the weaker ‘treps? Just wondering if there’s any way of going further beyond the numbers!