Posting in Government
The Kauffman Index shows that, despite a drop from 2010, U.S. startup activity remains above pre-recession levels. But is its definition of 'entrepreneurial' too narrow?
Entrepreneurship is thriving in the wake of the recent recession, although the rate of new business creation dipped slightly during 2011 and startup founders remained more likely to fly solo than employ others.
Those are findings from the latest Kauffman Index of Entrepreneurial Activity, an annual report published by the Ewing Marion Kauffman Foundation to track new business creation.
The Index shows that 0.32% of American adults created a business per month in 2011 – a 6% drop from 2010, but still among the highest levels of entrepreneurship over the past 16 years. The quarterly employer firm rate also remained essentially flat from 2010 to 2011 at 0.11%.
Still, entrepreneurship surged during the four-year course of the downturn, reflecting the diminished opportunities in corporate settings. The startup rate hovered around 0.29% to 0.20% in 2005-2007, before the downturn hit. Last year's decrease may reflect an uptick in the corporate sector.
Why the increased trend toward solo ventures? As Robert Litan, vice president of research and policy at the Kauffman Foundation, puts it:
"The recession has pushed many individuals into business ownership due to high unemployment rates. However, economic uncertainty likely has made them more cautious, and they prefer to start sole proprietorships rather than more costly employer firms. This 'jobless entrepreneurship' trend negatively effects job creation and the larger economic recovery."
The Kauffman Index draws data from the monthly Current Population Survey (CPS), conducted by the U.S. Bureau of the Census and the Bureau of Labor Statistics, which queries residents on their employment status, and thus captures entrepreneurs in the early startup stage. Interactive data spanning all 16 years is available at www.kauffman.org/kiea.
By industry type, construction had the highest entrepreneurial activity rate at 1.68%, continuing an upward trend over the past several years, followed by the services industry at 0.42%. The manufacturing startup rate was the lowest among all industries, with only 0.11% of non-business owners starting businesses per month during 2011.
While the Kauffman numbers looked at new business startups as a measure of entrepreneurship, it should be mentioned that "entrepreneurs" can arise in all kinds of settings. They can be innovators within large organizations, or even within government agencies. Or, they can be leaders of non-profit groups or movements. The entrepreneurial spirit isn't -- and shouldn't be -- limited to startups.
The study also finds that both immigrant and native-born entrepreneurial activity declined slightly in 2011; however, immigrants remained more than twice as likely to start new businesses as were the native-born.
Among the United States' 15 largest metropolitan statistical areas, Los Angeles had the highest entrepreneurial rate (580 per 100,000 adults) in 2011. No explanation as to why Chicago and Detroit had the lowest rates, at 180 per 100,000 adults. Here are the metro standings, ranked by number of entrepreneurs per 100,000 residents:
- Los Angeles-Long Beach-Santa Ana, CA 580
- Atlanta-Sandy Springs-Marietta, GA 500
- Phoenix-Mesa-Scottsdale, AZ 500
- Miami-Fort Lauderdale-Miami Beach, FL 470
- Riverside-San Bernardino, CA 430
- New York-Northern New Jersey-Long Island, NY-NJ-PA 420
- Houston-Baytown-Sugar Land, TX 400
- Dallas-Fort Worth-Arlington, TX 370
- San Francisco-Oakland-Fremont, CA 370
- Seattle-Tacoma-Bellevue, WA 290
- Boston-Cambridge-Quincy, MA-NH 260
- Washington-Arlington-Alexandria, DC-VA-MD-WV 230
- Philadelphia-Camden-Wilmington, PA-NJ-DE 200
- Chicago-Naperville-Joliet, IL-IN-WI 180
- Detroit-Warren-Livonia, MI 180
Mar 21, 2012
Entrepreneurship seems slightly misstated here and some conclusions are suspect, and this is why: Employers are looking to remain flexible, so they're hiring independent contractors, which means that one has no choice but to become a sole proprietorship, which is the automatic designation when one becomes self-employed. To confirm this point, the study specifically states that the data it takes from the CPS includes, "all business owners, including those who own incorporated or unincorporated businesses." Secondly, looking at their conclusion of age group changes relative to the number of the self-employed, it's also possible that the rise in entrepreneurship (forced self-employment) among older Americans reflects age bias in hiring. There is some anecdotal evidence that this is occurring, at a time when employers have greater room to be picky (big labor supply, low labor demand).
The IRS has been clamping down on "independent contractors" with a single sources of income. But it's not hard to see why employers wish to take this approach; "employees" are getting more and more expensive, and will become even more so next year when the tax laws change. Nobody wants to commit to more than they absolutely have to. It's sad that "employees" are now considered more liability than asset.