Contrary to What You May Have Read, the Recession Hasn’t Been Good for Entrepreneurs

If you’ve been reading the newspaper recently, you might have heard that the Great Recession has been a boom time for entrepreneurs. No less an authority than former Labor Secretary Robert Reich wrote in a New York Times opinion piece, “LAST year was a fabulous one for entrepreneurs, at least according to the Kauffman Index of Entrepreneurial Activity released last month by the Ewing Marion Kauffman Foundation.”

Reich quotes the Foundation as saying “Rather than making history for its deep recession and record unemployment, 2009 might instead be remembered as the year business startups reached their highest level in 14 years – even exceeding the number of startups during the peak 1999-2000 technology boom.”

Because the idea that the recession has been fabulous for entrepreneurs didn’t fit with what I’ve been seeing for the past two years, I took a closer look at the numbers.

The Kauffman index uses information from the Current Population Survey (CPS) to measure “the percentage of the adult, non-business-owner population that starts a business each month.” Specifically, the Index is the ratio of the number of people between the ages of 20 and 64 not self-employed who became self-employed in a given month, divided by the population between those ages.

This percentage rose from 300 people per 100,000 in 2007 to 340 per 100,000 in 2009.

But this is where the numbers get a bit odd. The Bureau of Labor Statistics (BLS) uses the CPS to measure self-employment, and they reported that the number of people self-employed outside of agriculture fell from 9,557,000 in 2007 to 8,995,000 in 2009, a decline of 5.9 percent. (Because the population grew over this period, the decline in self-employment as a percentage of the population is an even larger 7.5 percent.)

For those of you who are still with me on the numbers, this means that the Kauffman Index of Entrepreneurial Activity and the BLS estimates for self-employment, which are both drawn from the same monthly survey, tell very different stories about what has happened to self-employment during the recession. The Kauffman Index shows a 13.3 percent increase from 2007 to 2009, whereas the BLS shows a 5.9 percent drop over the same period.

Although these numbers look contradictory at first glance, they are not because they measure different things. The BLS figures track the number of people who are working for themselves at a moment in time. By contrast, the Kauffman Index measures the number of people who become self-employed in a particular month.

What’s not measured by either source is the number of people who quit self-employment in a particular month. And the missing number is the key to putting both figures together.

As the Kauffman Index shows, during the recession, the number of people who moved into self-employment increased. But as the BLS shows, the number of people who are self-employed in at any point in time has declined. For both these numbers to be correct – and I have no reason to doubt the accuracy of either one – a lot of people must have given up on self-employment in 2009.

According to the Kauffman Index, an estimated 6.7 million Americans went from not being self-employed to being self-employed last year. Given the 224,000 person drop in the number of self-employed people reported by the BLS, 6.9 million people must have quit working for themselves in 2009.

Do these numbers mean that “last year a fabulous one for entrepreneurs” as Reich wrote in the New York Times? Are the results of the Kauffman Index really “good news for the year 2009” as Kirsten Moore wrote in Newgeography?

I don’t think so. If we accept the Kauffman Foundation’s argument that the self-employed are entrepreneurs, then the CPS data show an entrepreneurial sector that has been damaged by the recession. The statistics indicate that the self-employment failure rate has become so large that the number of people working for themselves has dropped, despite a sizeable increase in the number of people becoming self-employed.

The reporters, bloggers and others making use of the Kauffman Index of Entrepreneurial Activity should be more cautious about how they interpret it. Headlines like “Despite Recession, U.S. Entrepreneurial Activity Rises in 2009 to Highest Rate in 14 Years, Kauffman Study Shows” give the misleading impression that the recession has been good for entrepreneurs.

And I don’t know a lot of people who would call the Great Recession “fabulous” for those who work for themselves.

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.