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A Slowdown in Startups

Young firms in steep decline
  • May 16 2012

Entrepreneurship is a part of the American dream, but there are fewer new companies today than there have been since the startup rate began being tracked in the mid-1970s.

According to the Census Bureau’s Business Dynamics Statistics (BDS) and the Ewing Marion Kauffman Foundation, the entrepreneurial think tank that partially funds the research, the nation’s business startup rate fell below 8 percent for the first time ever in 2010.

The metric, which looks at new firms as a percentage of all firms, has been on a steady downward trend. It has gone from a high of around 13 percent in the 1980s to just under 11 percent in 2006 to 8 percent following the most recent recession.

Young firms—those five years old or younger—now comprise fewer than 35 percent of all firms, down from nearly 50 percent in the early 1980s, according to the BDS data. This decrease is accompanied by a decline in the share of employment accounted for by entrepreneurial firms from 20 percent in the 1980s to 12 percent in 2010. The share of job creation also has fallen, from more than 40 percent in the 1980s to about 30 percent in recent years.

The national decline is seen in all states, although some states have fared better than others. While the report does not analyze causes for individual state activity, it shows that state-level drops ranged from 2 percent to 14 percent when changes from the 1987-1989 and 2004-2006 business cycle peaks were compared. Further, states that experienced the largest declines also were, for the most part, those in which young businesses had the highest initial shares of business activity in the 1980s. These states typically were in the West, Southwest and South—the regions hit hardest by the recession, the report notes.

In a separate study released in April that measures annual employer and non-employer business creation in the United States, the Kauffman Index of Entrepreneurial Activity also showed a decline in the number of startups nationally and in all regions except the Northeast. In this study, founders were more likely to be sole proprietors than they were to create jobs.

 

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