Why Hasn’t the Recovery Led to a Growth in Entrepreneurial Activity?

Source: Created from Bureau of Labor Statistics data

Instead of growing, entrepreneurial activity has shrunk during the current economic recovery. Bureau of Labor Statistics estimates show that the number of incorporated self-employed – the government’s most current measure of the stock of entrepreneurs in the economy – was 4 percent lower in September 2014 than it was in June 2009, when measured as a fraction of the (non-military, non-institutional) population.

The decline is modest in comparison to the 10 percent drop in the per capita rate of incorporated self-employment during the Great Recession. But that reduction isn’t surprising. Economic slowdowns cause a lot of people’s entrepreneurial efforts to fail and deter many would-be entrepreneurs from setting up shop.

However, now that we are more than five years into the current economic expansion, we should have seen a recovery in entrepreneurial activity. When the economy begins to grow again after a downturn, sales at already existing businesses should increase, causing their profits to rise. As a result, fewer of those businesses should go under than when the economy is contracting. At the same time, would-be entrepreneurs should be attracted by the rising sales at existing businesses and become more likely to set up shop. Together a declining exit rate and a rising entry rate should increase the number of people running their own businesses.

The rate of entrepreneurship appears to have stopped declining in mid-2010, as the figure above shows. But we haven’t yet seen an upward trend in the per capita rate of incorporated self-employment. (The dotted line in the graph shows the six month moving average in the measure, which was used to smooth out the noise in the monthly estimates.)

Data from the Gallup/Wells Fargo Small Business Index indicate that sales, profits, and cash flow at small businesses have all risen since the start of the economic recovery. In the third quarter of this year, 43 percent of small business owners told the surveyors that their company revenues increased over the past 12 months, up from 24 percent in the second quarter of 2009. Fifty-five percent reported that their cash flow was good or very good in the third quarter of this year, versus only 44 percent in the second quarter of 2009. And 62 percent said their business’s financial situation was good or very good, as compared with only 55 percent in the second quarter of 2009.

Figures from the National Federation of Independent Business (NFIB) confirm this positive trend. The net percentage of NFIB members reporting higher earnings over the previous three months – the fraction saying that their earnings were higher less the portion saying their earnings were lower – improved from -42 in June 2009 to -19 in September 2014. And the net percentage reporting higher sales over the previous three months improved from -34 at the beginning of the recovery to -4 in September 20014.

If small business owners are reporting that their businesses’ sales, earnings, cash flow, and financial conditions are all better than they were at the start of the economic recovery, then the rate of entrepreneurship should be increasing. Better economic conditions should have reduced the number of people giving up on their entrepreneurial efforts and motivated more would-be business owners to take the plunge.

Why do you think the economic expansion hasn’t led to a recovery in entrepreneurial activity?

Chart Source: Created from Bureau of Labor Statistics data

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.