May 18, 2024

Economix: A Decline in American Entrepreneurship

American workers weren’t the only ones sacrificed by the Great Recession. Start-ups suffered, too.

A new paper from the Federal Reserve Bank of Cleveland tracks various measures of entrepreneurship over the last few years. It found that the number of businesses with employees — one indicator of entrepreneurial activity, like self-employment — took a nosedive.

The chart below shows the number of businesses in the United States, adjusted for population growth.

DESCRIPTIONScott Shane, “The Great Recession’s Effect on Entrepreneurship,” Federal Reserve Bank of Cleveland.

As you can see, the population-adjusted number of businesses began falling even before the recession officially began in December 2007. But once the downturn hit, the number of businesses began falling precipitously.

Some of that decline was because of business failures. But it was primarily tied to the lack of new business formation. The report’s author, Scott Shane, writes:

68,490 more businesses closed in 2009 than in 2007, an 11.6 percent increase in the business closure rate. But in 2009, 115,795 fewer employer businesses were founded than in 2007, a 17.3 percent decline in firm formation.

The financial crisis held back new business formation in many other countries, too, as documented by this paper presented last fall at the Federal Reserve Bank of Atlanta.

Given these findings, it is perhaps no wonder that the job market is still so poor.

Young businesses (not small businesses, despite what politicians may tell you) are the biggest engines of job growth. With so few businesses forming, hiring is staying very depressed. And the main problem in the job market is not layoffs — which are at a record low — but new hiring.

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