Is Entrepreneurship Dead

Is Entrepreneurship Dead?
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IS
ENTREPRENEURSHIP
DEAD?
THE TRUTH ABOUT

S TA R T U P S I N A M E R I C A
❉ ❉ ❉
S COT T A . S H A N E
New Haven and London
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Published with assistance from the foundation established in memory
of Amasa Stone Mather of the Class of 1907, Yale College.
Copyright © 2018 by Scott A. Shane. All rights reserved. This book

may not be reproduced, in whole or in part, including illustrations,
in any form (beyond that copying permitted by Sections 107 and
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Yale University Press books may be purchased in quantity for

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Library of Congress Control Number: 2017954786

ISBN 978-0-300-21211-2 (hardcover : alk. paper)
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ANSI/NISO Z39.48-1992 (Permanence of Paper).
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To Hannah, Lynne, and Ryan
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Contents
Preface ix
Introduction 1
1 Something Is Happening, but We
Don’t Know What It Is 17
2 The Good News: Most Measures of
Entrepreneurship Have Improved 30
3 Entrepreneurial Earnings Are on the Rise 49
4 Riding High 63
5 The Implications of Fewer Employer Startups 79
6 It’s Not a Lack of Capital 95
7 Don’t Blame the Regulators 108
8 High Taxes Are Not the Cause 123
9 It’s Not a Lack of Immigration 133
10 An Aging Population Isn’t the Reason 145
11 Slowing Population Growth Isn’t the Explanation 153
12 Rising Student Debt Is Not the Cause 163
13 Don’t Blame a Loss of Moxie 176
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CONTENTS
14 Employees Have Become Too Expensive 187

15 Chains Have Replaced Independent Employers 205
16 The Story the Data Are Telling 216
Notes 229
Index 245
viii
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Preface
This is not the book I intended to write. About two years ago,
I sent a proposal to William Frucht at Yale University Press for a
book explaining why entrepreneurship in the United States was in
long-term decline. After concluding a series of conversations with
entrepreneurs, academics, government officials, media pundits, and
representatives of major foundations that support economic develop-
ment, I had become convinced that something was seriously wrong.
The experts showed me evidence of a long-term decline in business
formation and gave me earnest explanations of what had gone wrong.
Each one encouraged me to investigate the problem and then write a
book explaining the causes and offering his or her solution.
It took me longer than expected to write this book because my
initial premise was wrong. American entrepreneurship isn’t in de-
cline. But it has changed. The entrepreneurs, academics, government
officials, media pundits, and economic development professionals I
had spoken to were incorrect because they had looked at only a small
part of the total picture. Because they often sought to advocate a
particular set of policies, they had drawn conclusions from small bits
of data.
Examination of all of the data tells a far more complex story. The
Twitter-length summary of my two and a half years of investigation
is this: “Entrepreneurship up, but new employers down. Existing
small biz doing OK. Labor costs and chain growth to blame.”
ix
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P R E FA C E
If you think you can understand complex economic phenomena

from tweets, save your money. Put the book back on the shelf. You
have the answer.
But for those of you who want to understand what has hap-
pened to entrepreneurship in America, read on. It’s an interesting
and complex story, and one that few people in government, the me-
dia, or academia know. As someone whose job is to follow statistics
on entrepreneurship intensively, I was surprised at where the data
took me.
I looked at statistics from the Internal Revenue Service, the Fed-
eral Reserve, the U.S. Census, the Bureau of Labor Statistics, and
many other sources. At first they were a jumble of conflicting num-
bers, but eventually they began to tell a story. It wasn’t the story I set
out to tell.
Once I had all the data patterns, I went back to all the theories
the policy makers, academics, and media folks were proposing, and
I compared the data to their explanations to see whether they could
possibly be correct. In a few cases, they could. In most cases, they
could not. The data were simply inconsistent with the explanation
on offer.
I ended up looking through many more data sources, articles,
and books than I had intended. From that process, I discovered the
work of several obscure researchers who had figured out what was
happening when the rest of us were largely clueless.
I am indebted to the authors of the surveys, research projects,
books, and articles who gathered and summarized these answers.
Their work was crucial to my effort to describe the reality of entre-
preneurship and how it has changed.
I had the great fortune of working with Mark Schweitzer at the
Federal Reserve Bank of Cleveland and Ian Hathaway of Ennsyte
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P R E FA C E
Economics, both of whom helped this book immensely. While an

astute reader will see that I do not necessarily agree with everything
these authors have written about entrepreneurship in recent years,
their analysis of the topic has forced me to sharpen my own analysis
and to look harder at what the data showed.
Over the years, many colleagues have taught me a great deal about
the topics discussed in this book. Howard Aldrich, Per Davidsson,
Frederic Delmar, Jon Eckhardt, Bill Gartner, Dave Hsu, and Nicos
Nicolaou stand out as particularly important. This book would not
have been possible without their help.
My editor, William Frucht, believed in this project when many
others did not. He did not flinch when the book took a completely
different turn from what I had initially proposed. For his willingness
to take a chance on it and stick with it through the turns, I am truly
grateful.
Lastly, I would like to thank my wife, Lynne, daughter, Hannah,
and son, Ryan. They have all helped me in their own ways: Hannah
and Ryan by being excellent playmates when I needed breaks from
writing, Lynne by encouraging and supporting my efforts, including
the creation of this book.
xi
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Introduction
We Americans love entrepreneurs. As Malcolm Gladwell wrote,

we see company founders like Sergey Brin, Bill Gates, Steve Jobs,
and Mark Zuckerberg as “our new prophets.”1
Gladwell aside, however, this attitude is not new. Entrepreneur-
ship has been central to our nation since its inception. Entrepreneurs
have played an important role in the development of new technol-
ogy, the generation of wealth, and the creation of jobs and have been
a major reason other nations have looked to the United States as an
example. As Alexis de Tocqueville wrote (not entirely approvingly)
nearly 200 years ago, “As one digs deeper into the national character
of the Americans, one sees that they have sought the value of every-
thing in this world only in the answer to this single question: how
much money will it bring in?”2
The importance of entrepreneurship to America means that those
in Washington take very seriously any indication of weakness in its
performance. Lately, many policy makers and pundits have become
worried. They have seen evidence of stagnation, even a downturn,
in American entrepreneurialism. As David Burton, senior fellow in
economic policy at the Heritage Foundation, told a congressional
committee in 2015, “Entrepreneurship is in decline.”
Americans, it appears, are not starting new businesses with paid
employees at the rate they once did—at least according to several
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INTRODUCTION
data sources. For instance, the formation of “new employers”—the

term the Census Bureau has given to companies with paid work-
ers—has fallen below its replacement rate. Since 2008, according to
Census Bureau records, the number of employer businesses shutting
down each year has exceeded the number formed.3
If entrepreneurship were in decline, the implications could be
enormous. Shrinking entrepreneurship could mean a more rigid
economy, one less able to respond to shocks. Older firms are less
flexible than new firms. They cannot hire and fire as quickly or shift
direction as easily. A reduction in entrepreneurial activity could thus
make it more difficult for the economy to respond to changes. New
technology might spread through the economy more slowly; labor
markets might adapt less well to recessions and recover more slowly
during expansions.
New employers are a key source of job creation. If American
entrepreneurs are founding fewer new companies, then the economy
might be producing fewer jobs, leading to less employment in the
long run.
The opportunity to start companies plays an important social
and economic role. Starting a business has historically been a key
avenue for getting ahead for those not born wealthy. A big decline
in employer firm formation might mean a dramatic cut in class
mobility.
Janet Yellen, the chair of the Federal Reserve, does not say very
much about entrepreneurship and how it affects economic mobility,
but occasionally she addresses the topic. In October 2014 at the Con-
ference on Economic Opportunity and Inequality in Boston, Yellen
highlighted the adverse effects a decline in entrepreneurship could
have on economic mobility: “The ownership of private businesses is
a significant source of wealth and can be a vital source of opportunity
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INTRODUCTION
for many households to improve their economic circumstances and

position in the wealth distribution. . . . It appears that it has become
harder to start and build businesses. The pace of new business cre-
ation has gradually declined over the past couple of decades.”4
One of the hallmarks of entrepreneurship is its ability to cre-
ate many Horatio Algers. Only a small fraction of new employers
grow and generate wealth for their founders. If that fraction remains
roughly constant yet the number of companies formed declines, it
could mean less economic mobility. Fewer successful new businesses
could mean fewer people riding them up the economic ladder.
Moreover, economic mobility does not just come from high-
growth companies. Entrepreneurship offers a tax-favored way to earn
a living and lets people boost their incomes by increasing the amount
they work. Even founders of small businesses that never grow often
move from poor to middle class.
Another reason policy makers should be concerned about a po-
tential decline in entrepreneurship is that new business creation is
important to economic productivity. Productivity—the ability to
generate more output from a given amount of inputs—is a key way
for an economy to improve living standards, and investing in ma-
chinery and equipment boosts productivity. New technologies and
equipment allow businesses to produce more output for each hour
of worker labor.
Entrepreneurship plays an important role in generating capi-
tal investment. New businesses tend to make larger investments in
capital equipment and structures than comparably sized companies
already in operation because these investments are necessary to get
businesses going. If entrepreneurship were to decline, businesses
might engage in less capital investment, which in turn would reduce
productivity growth. New businesses also tend to be created with
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INTRODUCTION
current technology, which generally yields higher productivity than

older technology.
A decline in new businesses could also mean a decline in innova-
tion. Not all new technologies are developed by new and small com-
panies, of course, but many are. Small firms produce more new prod-
uct innovations per dollar of research and development expenditure
and per employee than large firms.5 These innovations are, of course,
a key to productivity growth. When a small company comes up with
a new product or service—the personal computer or the electronic
spreadsheet—that advancement contributes to productivity.
In contrast, businesses that die are generally the least productive.
Companies that make efficient use of resources are more likely to
stick around than less efficient ones. And this efficiency increases
with turnover: new businesses often start because they have a better—
more productive—way to accomplish the same goals as existing
businesses. Constant formation of new, more productive businesses
to push aside older, less productive businesses is one way that pro-
ductivity increases across an economy. If this process were to slow
down, the rate of productivity increase could slow as well.
Many people have seen the data on new employer firm forma-
tion rates and are sounding an alarm. White papers, columns, and
blog posts decry the problem. “American Entrepreneurship Is in
Decline,” the headlines blare, and something needs to be done to
stimulate it. Editorials assure us that policy makers must intervene
to protect the country’s business founders from economic ruin. The
suggestions range from issuing startup visas and boosting entrepre-
neurial education, to fixing the tax code, subsidizing credit, changing
our culture, cutting regulation, and investing in broadband.6 The
list goes on and on. In 2015, David Burton of the Heritage Foun-
dation offered ninety-seven separate recommendations to Congress,
relating to “tax policy, securities regulation and capital access, health
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INTRODUCTION
care, energy and environmental regulation, administrative law and

regulation, employment and labor law, immigration and the legal
system.”7
There are several issues with this rush to offer up solutions. The
first is identifying whether there really is a problem. One indicator
of entrepreneurship—the rate at which new employers are being cre-
ated versus the rate at which existing ones shut down— doesn’t look
good these days. But it is not the only measure of entrepreneurship;
we need to look at other measures before we conclude that entrepre-
neurship per se is in decline. Also, these data are from the U.S. Cen-
sus, and different data, like those from the Federal Reserve and the
Bureau of Labor Statistics and the Internal Revenue Service, do not
always agree with the Census. We should look at those sources before
we rush to conclude that American entrepreneurship is in decline.
The second is the problem that the rate of creation of high-
potential businesses (as measured by angel- and venture-capital-
backed companies) has gone up over the same period that the rate
for formation of more typical employers has gone down. We need to
know if the rise in the rate of creation of those kinds of businesses
makes up for the decline in the rate of formation of more typical
employers before we conclude that something is wrong. But no one
is weighing the value of the types of new businesses that are being
created at a faster pace against the value of the companies that are be-
ing started at a slower pace. If we are creating more venture capital-
and angel-backed companies, but fewer mom-and-pop retail shops,
that might be OK for job creation and GDP growth. A few extra
Facebooks and Googles are probably worth a lot of clothing shops
on Main Street because they produce a lot more jobs and economic
output.
Third, the decline in the rate of formation of new employers
might not in itself be a problem. Unless the decline has adversely
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INTRODUCTION
affected a key aspect of the economy, like productivity, employment,

or GDP growth, it does not matter. People often think of new em-
ployers like motherhood, baseball, and apple pie. Somehow, they
think, a high rate of business creation is important in its own right.
But employer firm formation is not an end in itself.
When people are creating new companies, they are allocating
resources—their time and money—to the formation of those enti-
ties. If their time and money would be better spent on other things,
for example, working for big companies or on leisure activities, then
a high rate of new employer creation is not a good thing; it is a mis-
allocation of resources.
What we really need to know is whether the decline in the rate
of employer creation has adversely affected our economy or society.
The data on that question are not really convincing, as I will show.
No one has linked the decline in the rate of employer creation to a
fall in overall employment, a slowdown in productivity, or decelera-
tion of GDP growth. In fact, it is possible that the decline in the rate
of employer creation has kept employment, productivity, and GDP
growth from being worse than it otherwise would have been.
Fourth, it’s not clear that any of the proposed solutions to the
decline in the rate of new employer firm formation will work. Edito-
rial writers and elected officials tend to think that complex problems
have easy solutions. Seeking to justify a position on one side or an-
other and advocate pet policy positions, many observers look only at
the numbers that fit their world views—then propose solutions that
don’t fit the problem.
Whatever has happened with entrepreneurship in this country
will not be fixed simply by deregulating, cutting taxes, or issuing im-
migrant visas. The patterns may result from factors that government
does not control. And every proposed solution—to anything—has
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INTRODUCTION
unintended consequences. Bearing that risk makes sense only if the

proposed solution addresses the actual cause of the problem. To fig-
ure that out, we need to examine the data and trace out what the de-
cline in entrepreneurship actually consists of and whether the cause
we have proposed is plausible or not.
This book offers a careful look at the data—all of it—to see what
has happened to entrepreneurship in America over the past thirty-
plus years. I look closely at the indicators from the Federal Reserve,
the Bureau of Labor Statistics (BLS), the Census Bureau, the Internal
Revenue Service (IRS), and the rest of the alphabet soup of federal
agencies that have collected good data on American entrepreneur-
ship over the past several decades. I look at the private sources as
well—the data from top academic institutions, like the University
of Chicago, and trade associations, like the National Federation of
Independent Business, that have been gathering the numbers for a
long time.
Those sounding the alarm are not completely wrong. Some mea-
sures are clear and should concern policy makers. Americans have
cut back dramatically on starting new businesses with employees. In
2013, according to Census Bureau data, the per capita rate at which
Americans started new employers was only half of its 1977 level. That
is a big decline and one worthy of scrutiny.
Other figures are also alarming. The BLS tells us that unincor-
porated self-employment—the fraction of the labor force that works
for themselves in unincorporated businesses—has sunk to record
lows, hitting 6.4 percent in 2015, down from 8.7 percent in 1975.
The share of American households owning a business has fallen from
14.2 percent in the mid-1980s to 11.7 percent in 2013, the Federal
Reserve estimates. And Americans today are less likely to start com-
panies when they lose their jobs. The fraction of laid-off job seekers
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INTRODUCTION
looking to start companies is well below 1980s levels, according to

data from the outplacement firm Challenger, Gray and Christmas.
And employment in new companies is down substantially. The Cen-
sus Bureau finds that American companies less than one year old
accounted for only 2.0 percent of American employment in 2013,
down from 5.7 percent in 1977.
Yet understanding what has happened to entrepreneurship in
America over the past thirty years requires more than taking a ca-
sual glance at a couple of numbers. Because no one statistic measures
entrepreneurship writ large, figuring out what is going on requires
looking at all of the numbers and piecing together the story they
collectively tell.
What has happened to entrepreneurship in America is compli-
cated. It’s not that the data lie. The measures of entrepreneurship de-
scribed above have shown long-term declines. The catch is that other
data tell a different story. Put together, the evidence doesn’t warrant
the conclusions that many pundits and policy makers have drawn,
and it doesn’t support the solutions they are offering.
The first key fact is that entrepreneurship per se is not in de-
cline. But a particular kind of activity has been dropping over the
past three-plus decades. The rate at which Americans are starting
and running employer firms has fallen. However, businesses with em-
ployees are actually a small fraction (around one-fifth) of all U.S.
companies.
Americans haven’t stopped creating companies. Far from it. As
I will show in more detail in chapter 2, IRS data indicate that the
number of businesses has been growing on a per capita basis.
Americans, it turns out, are creating and running businesses at
a higher rate than they used to—but they are mainly starting and
running businesses without employees. That nuance suggests that
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INTRODUCTION
the problem with American entrepreneurship and the effective solu-

tions to that problem are different from what many are suggesting.
Boosting startups in general probably isn’t the answer, because a fall
in startup creation isn’t the problem.
Other patterns also cast doubt on the simple “entrepreneurs are
in trouble” argument. High-potential startups backed by external
equity investors are doing very well indeed. As I will show in detail in
chapter 4, data from a variety of sources, including the National Ven-
ture Capital Association (the trade association of the venture finance
industry) and the Center for Venture Research at the University of
New Hampshire, indicate that more startups are getting angel and
venture capital financing than a decade or two or three ago. And
the outcomes of investments in those businesses are better than they
were in the mid-1980s.
America might be generating fewer typical startups—the ones
that don’t grow and quickly die—but more high-potential com-
panies that add workers, grow substantially, and soon go public or
get acquired. If the rate of creation of new employers is down but
the rate of creation of high-potential companies is up, then the de-
cline has to be specific to factors that affect Main Street and not Sand
Hill Road.
It turns out, however, that it is not just a handful of new compa-
nies backed by left coast financiers that are doing better than several
decades ago. A wider range of small business owners are doing well.
Older small companies—the ones that entrepreneurs have been run-
ning for many years—have greatly improved. Business failure rates
are down and real (inflation-adjusted) earnings are up compared to
the 1980s. For several decades, households led by people who own
their own businesses have been doing better than those led by people
who work for others.
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INTRODUCTION
Finally, even if the decline in the rate of employer creation was

adversely affecting our economic well-being, the “solutions” being
offered aren’t answers at all. As I will show, there is no compelling
evidence that barriers to immigration, excessive regulation, too high
taxes, student loans, or any of the myriad other so-called causes of
the decline in rates of new business creation are actually responsible
for the decline in the pace of employer firm formation. If these fac-
tors are not the causes of the decline, then changing them will do
nothing to boost the rate at which Americans form businesses with
employees. Combating the decline in new employer firm formation,
if it is even a genuine problem, requires addressing the factors that
are really responsible, rather than the many irrelevant factors that
are often put forward as solutions, generally to further someone’s pet
policy.
Consider, for example, the call for more visas for immigrants
seeking to start companies in the United States. There is little rea-
son to think this policy would do anything to stem the decline in
employer businesses. For startup visas to reverse this trend, two pat-
terns would need to be present in the data. First, the decline in new
employer firm formation that has occurred over the past thirty-plus
years would need to have resulted from a decline in immigration. But
the data show the opposite. Over the past thirty years, immigration
has skyrocketed while the rate at which Americans start businesses
with employees has plummeted.
Second, immigrants would need to be more likely than non-
immigrants to start and run businesses with employees. But there is
nothing in the data to suggest that the fraction with employer busi-
nesses is different between immigrants and non-immigrants, or that
the incentives that lead American entrepreneurs to avoid employing
others do not apply equally to immigrants.
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INTRODUCTION
Another common “solution” to the decline in new employer busi-

ness creation is tax cuts. Again, it is difficult to see how tax increases
account for a nearly four-decade fall in new employer business for-
mation. Income tax rates have tended to decline, not increase, over
this period. If high taxes were the problem, then falling taxes should
not be associated with a decline in employer firm formation.
Or consider access to credit. American entrepreneurs are in trou-
ble, the argument goes, because they cannot get the credit that they
need. Banks cannot make money lending to small companies and are
exiting the market, starving new companies of needed financing. Yet
while it is true that many banks have cut back on making these loans,
small business owners appear to be borrowing more now than they
did in the late 1970s. If so, a lack of access to credit hardly seems to
be a cause of their problems.
In addition, the average small businesses seems to be doing fine.
Small company failure rates are down and earnings are up. If credit
access were really a problem, then all small businesses would need to
be affected, not just new ones.
The message echoing through the blogosphere is too simplistic.
American entrepreneurship is not in decline. But it has changed in
many ways. What can we learn from trying to put together the dif-
ferent pieces of data into a coherent story?
If the overall startup rate has not declined over the past thirty-
six years, but the startup rate of businesses with employees has gone
down, then we cannot say that all entrepreneurship is declining. And
if high-potential businesses and existing small businesses are not
adversely affected by the trends that have discouraged typical new
employers, then the cause of the reduction is specific to the kind
of run-of-the-mill new employer businesses— dry cleaners, restau-
rants, retail stores, and insurance brokers—that make up the bulk
11
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INTRODUCTION
of startups in America. Moreover, if older businesses, run by entre-

preneurs who started them many years earlier, are living longer and
making more money than they once did, we can’t really argue that
they are in dire straits.
This book provides a more precise and nuanced explanation for
the change in American entrepreneurship than the story told in the
policy white papers and blog posts. Ironically, the story that emerges
is no less interesting than the bold headlines.
In a nutshell, the story is this: entrepreneurship per se is not in
decline in the United States, but American entrepreneurs are not
starting businesses with employees at the pace they did a generation
ago. That decline may have consequences—for employment, inno-
vation, investment, and the overall state of the American economy.
But we don’t know for sure that that is the case.
We need to understand why the rate at which people start busi-
nesses with employees is down—way down—from what it was in
the late 1970s and why, instead, Americans are starting and running
businesses without employees. And we need to know why these
changes haven’t adversely affected the rate of formation of high-
potential businesses and why their impact on the stock of existing
businesses with employees is much more muted.
It could be that there is no problem at all. Technology simply
has made it possible for more people to become entrepreneurs with-
out employees. My neighbor Margaret is one of these new-style en-
trepreneurs, the owner of a non-employer business. A stay-at-home
mom with school-age kids, she needs some extra income because her
husband’s salary has been flat for several years. So while her children
are at school, from 9:30 to 3:00, Margaret is an entrepreneur. A de-
cade or two ago, she might have gotten a part-time job at a store in
the shopping mall to make ends meet, but instead she sells things
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INTRODUCTION
on eBay. She makes more than she would in a minimum-wage job,

can set her own hours, and can’t be fired or laid off. Her example
shows both the opportunities and the incentives that are driving the
changes in entrepreneurship.
With the exception of 2008, on a per capita basis, America has
had more non-employer businesses like Margaret’s every year since
1997, when records began to be kept on an annual basis. Non-
employer businesses are, in the language of the Census Bureau, which
tracks them, “businesses with no paid employment and payroll.” This
self-evident definition indicates an important difference between
these firms and employer businesses: non-employer businesses don’t
create jobs.
Margaret is a fairly successful eBay seller. She has thought about
hiring an assistant to post pictures of the goods online and respond
to inquiries, but she doesn’t need someone every week, only during
busy periods. As for expanding beyond that, she feels employees are
too costly, not because of the salary but because of the benefits. She
has more flexibility using contractors to do the advertising, fulfill-
ment, and accounting that she doesn’t have time to undertake. A
generation ago, Margaret could not have pulled this off. Before eBay
existed, the only way to sell secondhand items was in a physical lo-
cation: she would have had to travel to flea markets or else had a
store. Traveling to flea markets would have kept her away from her
family on weekends; a store would have meant rent, furnishings, se-
curity, and insurance—all of which cost money. And it would have
meant employees: she could not have run such a business part-time,
if only because she couldn’t cover her expenses staying open only
during school hours, so she would have had to hire someone to sit
at the counter when her kids were home. Today she has a going con-
cern with the help of a smartphone, an Internet connection, a few
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INTRODUCTION
computer programs such as QuickBooks, and frequent visits from

UPS and FedEx. And she has no employees.
There is also another trend. Americans are spreading their en-
trepreneurial activity across more and more businesses. Where one
company would have sufficed thirty years ago, they now pursue the
same opportunities through two businesses or more.
Another of my neighbors, a fellow named Alex, has moved pretty
heavily into the sharing economy, renting vacation homes he owns
through online sites like HomeAway and Airbnb. Each of Alex’s three
properties—a beachfront condo in Florida, a ski condo in Utah,
and a pied-à-terre in Manhattan—is owned by a separate limited
liability company. That structure, his lawyer told him, was the best
way to minimize his exposure. Alex inherited the properties from his
parents. When they owned the apartments, in the pre-Internet era,
short-term rentals were too difficult to do; they rented the apart-
ments on yearly leases and reported the income on their personal
income taxes. Alex runs three times as many businesses as his parents
to engage in the same amount of entrepreneurship.
A third trend is the growing success of existing companies. Small
businesses are doing better today than they did thirty years ago. They
are living longer and providing more income. The improved perfor-
mance and longevity of existing small businesses has an important ef-
fect on startup rates. If existing companies aren’t going under, fewer
entrepreneurs are needed to replace them.
Moreover, the people running successful companies can expand
to new locations more easily than new entrepreneurs can start up.
Chains, even little two- and three-outlet ones that are limited to a
single city, are growing at the expense of new employer businesses.
Because the amount of entrepreneurial activity a place can support
depends on customer demand, the rate of new business formation is
limited by the degree to which existing businesses serve the market.
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INTRODUCTION
If existing companies are doing fine and expanding, new companies

are not needed to replace them.
This is self-evident in long-established locations. If Ray owns a
pizzeria on Flatbush Avenue in Brooklyn, New York, he may satisfy
most of the demand for pizza within a five-block radius. Ray has
been running his pizza place for twenty years, which is a pretty long
time according to the statistics. Before he bought the place, two pre-
vious owners had made pizza in the same location, one after another,
but neither business made it to age five.
With Ray’s Pizza humming along, there isn’t much opportunity
for anyone else to start a traditional pizza place in Ray’s neighbor-
hood. He pretty much meets the demand for pizza in the area. He
faces competition from a dozen or so other types of inexpensive res-
taurants, from nationwide chains to locally owned coffee shops to
trendy new offerings, but he can rely on a constant demand for pizza.
Every neighborhood needs at least one pizza place. If Ray’s went un-
der, someone else would no doubt open up a pizza shop somewhere
nearby. But as long as Ray is successful, that is unlikely to happen.
Now think about a place like Arizona. Over the past forty years,
neighborhoods grew up out of the desert as developers built houses
and offices farther out from the center of Phoenix. This created a
new demand for pizza in places where there had been none. Who
provided it? It turns out that the pizza parlor owners in the center of
Phoenix had a big advantage over would-be entrepreneurs in starting
parlors in the outlying areas. With the development of information
and communications technology, they could add outlets and run
them better than individual pizza shop owners could start their first
restaurants. Much of the pizza outlet growth in greater Phoenix was
existing operators. If you aggregate data like this, part of the reason
new business formation numbers are down is that existing businesses
are meeting the demand better than they once did.
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INTRODUCTION
In the chapters that follow, I will challenge the argument that

policy makers must intervene in the marketplace with a myriad of
policies to reverse a decline in American entrepreneurship. I will
show that American entrepreneurship isn’t in trouble. Far from it.
The rate at which Americans create non-employer and high-potential
businesses is up, as is business ownership. Earnings of business own-
ers have risen in inflation-adjusted terms and have become a more
important source of Americans’ compensation than was the case in
the 1980s.
The “entrepreneurship decline,” if such a pattern is real, lies in
the decrease in the rate at which Americans form new businesses
that employ others, and in the tendency of existing small businesses
to not employ as many people as they once did. But even that may
not be a true problem. Fewer people may be starting new businesses
because existing businesses are doing better, making more money,
and surviving longer than ever before. Moreover, the decline in the
rate of new employer business formation may simply reflect a more
efficient allocation of scarce resources in the economy toward big
business and non-employers.
Following the advice of policy makers and opinion leaders to
cut regulations, reduce taxes, boost immigration, cut student debt
payments, or any of the myriad other recommendations for reduc-
ing the decline in entrepreneurship is likely a fool’s errand. There is
no evidence that the reduction in the rate of formation of employer
businesses has hindered job or wealth creation, reduced productivity,
or limited economic mobility. Nor is there evidence of much of a
link between these policies and entrepreneurial activity.
As you will see in the coming pages, to those who are concerned
about American entrepreneurialism, I say, “Don’t worry. We’re good.”
16
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ONE
Something Is Happening,
but We Don’t Know What It Is
We keep reading that Americans are less entrepreneurial than

they were a generation ago. “U.S. entrepreneurship is in decline,” Ben
Casselman, Fivethirtyeight’s chief economics writer, said in a 2014
article on trends in startup rates.1 “We are behind in starting new
firms per capita,” writes Jim Clifton, chairman and CEO of Gallup,
calling it “our single most serious economic problem.”2 “Business
deaths now outpace business births for the first time since researchers
started collecting the data in the late 1970’s,” explains J. D. Harrison
in a Washington Post article.3
This is not a recent development. The decline was exacerbated
by the Great Recession of 2008, but it has been going on since at least
the late 1970s, when government researchers first began tracking the
data. Dane Stangler, the vice president of research and policy at the
Ewing Marion Kauffman Foundation, writes that “the overall pace
of business creation, which had been falling steadily for many years,
decreased precipitously in the 2008 –2009 recession.”4
The trends—at least according to pundits and reporters—are
grim. As Annie Lowrey puts it in New York magazine, “The country
is getting less entrepreneurial.”5 Fewer people are creating new firms
and older businesses are living longer. She continues, “In aggregate,
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SOMETHING IS HAPPENING
firms are aging. People are starting fewer new businesses, and older
businesses are doing better than their younger competitors. For all
the talk of ‘disruption’ in today’s economy, it is better to be a big, old
incumbent dinosaur than it is to be a lean, mean startup.”6
Pundits, reporters, and even policy makers who express concern
about a long-term decline in entrepreneurship in America aren’t just
offering their opinions. They are reacting to the data. Statistics on
American entrepreneurship since the 1970s tell a tale of changes that
disturb many people. To understand the alarm, we need to look at
the data these authors are examining.
Unincorporated Self-Employment Is in Decline

One easy measure of entrepreneurship is self-employment, the
fraction of people in the U.S. workforce who are in business for
themselves. This percentage is readily available, having been collected
by the Bureau of Labor Statistics (BLS), our country’s official tracker
of the labor force, for decades through regular surveys. While some
observers claim that self-employment, as a measure of entrepreneur-
ship, lumps independent contractors in with people running their
own companies, it does help capture what has happened over the
past few decades. It shows us how many people work for themselves
rather than someone else.
Every month, the BLS and the Census Bureau together com-
pile a survey called the Current Population Survey. They interview
over 70,000 American households designed to represent the entire
population over the age of fifteen that is not institutionalized or in
the military. The story told by the Current Population Survey’s self-
employment measure is unmistakable. The fraction of people in the
labor force who work for themselves but are not the heads of corpo-
rations—something called “unincorporated self-employment”—is
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Figure 1.1. The Unincorporated Self-Employment Rate

Source: Created from data from the Bureau of Labor Statistics.
in long-term decline. These people represented 8.7 percent of the

labor force in 1975 and 6.4 percent in 2015 (figure 1.1).
It is easy to get tricked into thinking this decline isn’t that large.
Unincorporated self-employment as a fraction of the labor force was
never that large. But the decline between 1975 and 2015 amounts to a
fall of more than 25 percent.
Buried in the BLS’s numbers are a couple of other indicators of
unincorporated self-employment that corroborate what has happened
to this primary measure. One of them is part-time self-employment.
Unlike the main measure of unincorporated self-employment shown
above, which captures what people do in their primary job, part-time
self-employment indicates what people do in any secondary work
they undertake. It’s a valuable measure because many people need to
work two jobs to make ends meet.
While the data on secondary self-employment do not cover as
long a period as the figures on primary self-employment, and far
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Figure 1.2. The Secondary Self-Employment Rate

fewer people engage in self-employment as their secondary occupa-

tion than as their primary occupation, the trend is similar. This frac-
tion has declined from 1.55 percent in 1999 to 1.11 percent in 2015
(figure 1.2).
Again, do not be deceived by the small numbers. The magnitude
of the decline is substantial. In just sixteen years, the secondary unin-
corporated self-employment rate has fallen by 28 percent.
As I mentioned earlier, many observers believe unincorporated
self-employment is a poor measure of “entrepreneurship.” Working
for oneself is not synonymous with running a business. Many self-
employed people are really independent contractors—people who
have chosen (or have been forced by circumstance) to be paid through
1099s as opposed to W-2 forms. Therefore, using self-employment
data to tease out what has happened to entrepreneurship requires an
interpretation of what different types of self-employment mean.
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To figure out the unincorporated self-employment rate, the BLS

surveys Americans to first determine if they are employed. If they are
working, it then asks if their employer is a private company, a non-
profit organization, the government, or themselves.
Here it gets tricky. Self-employed workers are further separated
into those who have incorporated their businesses and those who
have not. If you work for yourself and you have not incorporated
your business, your data go into the measure of unincorporated self-
employment. That’s the number we looked at above. But if you have
set up an S or C corporation, you will be counted as something called
incorporated self-employed.
The incorporated self-employment series is available only from
1989 to 2014, so it can tell us only about patterns over a shorter pe-
riod than unincorporated self-employment. But incorporated self-
employment represents economic activity that much more closely re-
sembles “entrepreneurship” than unincorporated self-employment.
Few people set up a C or S corporation simply because they have
been employed as contract workers or receive 1099 income.
Incorporated self-employment tells a very different story from
unincorporated self-employment (figure 1.3). Whereas the unincor-
porated variety has steadily declined since 1989, the incorporated ver-
sion is higher now than it was in the late 1980s, when the government
began to track it. And the increase is substantial. From 1989 to 2015,
incorporated self-employment rose from 2.9 percent of the labor
force to 3.7 percent. That’s a 28 percent rise in sixteen years.
We now have the first chink in the armor of the “entrepreneurship-
is-in-decline” story. Incorporated self-employment tells the opposite
story— one of increasing entrepreneurial activity.
Explaining the trends in self-employment thus requires two sep-
arate explanations, one for incorporated self-employment and one
21
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Figure 1.3. Incorporated Self-Employment Rate

for unincorporated self-employment. In fact, if we add the two rates,

we find that there has been essentially no trend in self-employment.
Researchers at the Pew Foundation analyzed the BLS data and con-
cluded that the combined rate of 10 percent in 2014 is the same as it
was in 1976.7
What’s happened is that the split between incorporated and un-
incorporated self-employment has changed, with incorporated self-
employment taking an increasing share of the total. It may be that
the factors that have driven unincorporated self-employment down
are specific to working for yourself but not to running an S or C cor-
poration. Or it may be that more people have the sophistication, and
access to advice, that leads them to incorporate, or that changing
tax laws or regulations make it more advantageous to incorporate. It
could be both.
The Pew Foundation analysts have an interesting explanation for
why unincorporated self-employment has fallen while incorporated
self-employment has risen. Most important, this explanation doesn’t
suggest that entrepreneurship per se is in decline. The researchers
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argue that unincorporated self-employment has fallen because the

share of self-employment in agriculture, forestry, and fishing has
been decreasing. These fields tend to have large numbers of unincor-
porated self-employed workers. Those unincorporated self-employed
workers, many of them seasonal workers, are more like independent
contractors than true entrepreneurs. So, in reality, the Pew Founda-
tion folks claim, incorporated self-employment is a better marker
of entrepreneurship than unincorporated self-employment. And that
measure has risen.
But which measure is better doesn’t really matter. Nor do the
specific causes of the changes in the rates of incorporated and un-
incorporated self-employment. What matters is that entrepreneur-
ship per se is not down, just a particular kind of self-employment.
Fewer People in Outplacement Services

Want to Start Companies
If unincorporated self-employment were the only measure of en-
trepreneurship that showed a decline, the story would end here, and
I would have written a blog post, not a book. But other statistics also
show declining entrepreneurial activity. One of the more interesting
is a quarterly survey by the outplacement firm Challenger, Gray and
Christmas, which works with workers laid off from big companies to
find their next gig. The outplacement firm has been surveying job-
seeking managers who have used its services since 1986.
The results of the quarterly survey suggest a major transfor-
mation in what people seek to do next after they have lost jobs at
big firms. In a nutshell, they have become much less interested in
starting companies. The percentage of people using outplacement
services who wanted to start their own companies dropped from
20.3 percent in 1989 to 5.5 percent in 2014. Even if we take away the
23
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Figure 1.4. Percentage of Job Seekers Starting Their Own Businesses

Source: Created from data from Challenger, Gray and Christmas.
big rise in this fraction between 1986 and 1989, the number of people
in outplacement who want to go into business for themselves has
fallen by half between 1986 and 2014. That’s enough of a decline to
make us think something has really changed (figure 1.4).
These numbers are more convincing than the data on self-
employment, which really seems to show only a shift from unincor-
porated to incorporated self-employment. But there is a catch. Chal-
lenger, Gray and Christmas is not the most credible source. It is a
private company whose goal is not to get a representative sample for
its survey, but to understand what happened to its clients. Perhaps
more important, its numbers are based on people who received its
24
Y7322.indb 24 1/17/18 10:56:35 AM

outplacement services—those who happened to work at the com-

panies that hired a particular company to provide services. We don’t
have a good sense of how this biased sample compares to the general
population, and this limitation makes it difficult to extrapolate from
the outplacement firm’s data to entrepreneurship generally. The
numbers are too fraught with potential error to be anything more
than suggestive.
The Damning Evidence

Fortunately, we have some really good data on entrepreneur-
ship. One of the best groups working on this is a set of researchers
at the U.S. Census Bureau, who have gathered and analyzed a data
set called Business Dynamics Statistics (BDS). These data, it turns
out, offer the most convincing evidence of a long-term decline in
entrepreneurship.
The BDS is an annual data series that measures businesses and es-
tablishments—places where business occurs—with employees since
1977. The series captures several important dimensions about these
entities, including their age and number of employees, and allows
economists to measure the number of newly formed businesses and
establishments, the number of people working in those businesses,
the failure rate of businesses, and a variety of other things. The Cen-
sus Bureau organizes it with help from the University of Maryland’s
renowned labor economist John Haltiwanger and financial support
of the Ewing Marion Kauffman Foundation. This series provides the
most accurate measurement we have of what is going on with busi-
nesses and establishments with employees.
The BDS is a census. It tracks every single business in the United
States that has at least one paid employee.8 The last point is very im-
portant. The BDS tracks what economists call employer businesses
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Y7322.indb 25 1/17/18 10:56:35 AM

—those that employ others. It does not measure non-employer busi-

nesses— companies that have zero non-owners on the payroll. This
is crucial because what has happened with non-employers over the
past several decades is very different from what has happened with
employers.
Using this database, economists Ian Hathaway of Ennsyte Eco-
nomics and Robert Litan of the Brookings Institution have published
several papers examining trends in what they call the “entrepreneur-
ship rate”: the fraction of American businesses with employees that
were formed each year since 1977.9 What they found has startled
many in the entrepreneurship community, and it is the main cause
of policy makers’ and pundits’ concern. An updated version of their
measure, calculated from census data, shows that the annual rate at
which Americans start new businesses with employees has fallen by
roughly half since the late 1970s (figure 1.5). New employer firms ac-
counted for 16.5 percent of all employer firms in 1977, but just 8.0 per-
cent of all employer firms in 2013. That’s a pretty hefty decline.
Figure 1.5. New Businesses as Percentage of All Businesses with Employees

Source: Created from data from the Census Bureau.
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Figure 1.6. New Employer Firms per Thousand People

Source: Created from data from the Census Bureau.
Such stark results always draw skepticism. So it is important to

show that the numbers are not just an artifact of how the authors
have organized the data. When we look at the per capita rate of cre-
ation of new employers, rather than new employers as a fraction of
all businesses, we see a similar pattern. In 1977, Americans founded
2.56 new employer businesses for every thousand people, but by 2013
that rate was down to 1.29 per thousand (figure 1.6). As the dotted
lines in the last two figures show, the long-term trend for both mea-
sures is clearly downward. The actual data tend to be above the trend
line in strong economic expansions and below it in recessions and
tepid recoveries, but the overall pattern is decline.
Hathaway and Litan are very careful researchers who don’t miss
much. They examined the patterns in a variety of different ways,
looking at what happened to new employer firms in different geogra-
phies, industries, and firm sizes. No matter how they sliced and diced
and julienned the data, the story was the same: declining employer
business formation over time.
27
Y7322.indb 27 1/17/18 10:56:35 AM

It was an important discovery. America is producing new busi-

nesses with employees at a much lower rate than it did three-plus de-
cades ago. I have only one issue with what Hathaway and Litan did.
They concluded from their analysis that “entrepreneurship is in de-
cline.” But what they actually found was narrower: they showed only
that the rate of creation of employer firms has gone down. Other
measures of entrepreneurship, as I have shown you and will continue
to show you, have actually increased.
Key Patterns in the Data

Here is what we have seen so far, in both the introduction and
this chapter:
1. The rate of unincorporated self-employment has trended

downward since the mid-1970s.
2. The rate of secondary self-employment has fallen since
1999.
3. Incorporated self-employment has trended upward since
the late 1990s.
4. The overall self-employment rate (unincorporated plus in-
corporated self-employment) has been flat over time.
5. The percentage of job seekers in outplacement looking
to start their own businesses has trended downward since
1989.
6. The rate of creation of new employer businesses fell by
more than half between 1977 and 2013.
Taken together, three important indicators of entrepreneurship in

America have declined. In recent decades, the rate of unincorporated
28
Y7322.indb 28 1/17/18 10:56:35 AM

self-employment, the fraction of people in outplacement seeking to

start businesses, and the rate of formation of new employers have all
gone down. But not all of these numbers are equally troubling.
The decline in the unincorporated self-employment rate can be
explained fairly easily. The rate of incorporated self-employment has
gone up at the same time that unincorporated self-employment has
declined. Together, these two measures show no trend up or down.
While the fall in the number of managers in outplacement start-
ing businesses after losing their jobs is real, the Challenger, Gray and
Christmas data are only suggestive. The figures come from a private
company whose goal is not to get a representative sample in its sur-
vey. The numbers are based on people who receive outplacement
services—a biased sample of people who happened to work at the
companies that hired a particular company to provide services.
But the third number—the one the policy makers and pundits
have jumped on— offers convincing evidence of a decline in entre-
preneurship in America. Carefully gathered and analyzed census
data, examined a variety of different ways, show that the rate of new
employer firm formation in 2013 was roughly half what it was 1977.
And that pattern is very robust: it is present across metro areas, states,
industries, and firm sizes.
But does this fall in new employer firm formation mean that
“entrepreneurship” is declining in America? Perhaps not.
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TWO
The Good News: Most Measures of
Entrepreneurship Have Improved
The last chapter clearly demonstrated an important fact about

entrepreneurship in America. The rate at which people create new
businesses with employees is half of what it was a generation ago.
For policy makers, academic observers, and even concerned citizens
who would like to see Americans starting more of these types of new
companies that’s a troubling sign.
Some economists, for example, Robert Litan and Ian Hathaway,
the researchers who first identified this trend, have concluded that
“the U.S. economy has become less entrepreneurial over time.”1 Pol-
icy makers, media experts, pundits, and many others have responded
to this news with a call for government action. As John Dearie, the
acting chief executive officer of the Financial Services Forum, and
Courtney Geduldig, formerly of the Financial Services Forum and
now an executive vice president at McGraw Hill M H Financial,
write in their book Where the Jobs Are, “America needs to get seri-
ous about enhancing the circumstances for new business formation,
survival and growth—particularly given the alarming reality that the
number of new firms launched each year . . . has declined signifi-
cantly in recent years.”2
I am all for government action if something is truly wrong, but
these writers have put the policy cart ahead of the data horse. The
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THE GOOD NEWS
rate of new employer firm formation has clearly declined, but we

should not jump to the conclusion that entrepreneurship has fallen
without first looking at other measures of it.
It turns out that other key measures of entrepreneurship tell
the opposite story. The number of businesses without employees—
measured relative to the population—has been increasing for sev-
eral decades. Moreover, the Internal Revenue Service’s estimates of
entrepreneurial activity suggest a different pattern from those of the
Bureau of Labor Statistics and the U.S. Census. Finally, measures of
the stock of entrepreneurial businesses look much better than mea-
sures of the flow of those businesses over the past several decades. (I’ll
define “stocks” and “flows” in a moment.)
To understand what has happened to American entrepreneur-
ship in recent decades, we need to look at these other measures and
then reconcile the different estimates to figure out the true story. In
a nutshell, it is a lot more complicated than just concluding from the
decrease in the rate of formation of new employer businesses that
American entrepreneurship is in decline.
Understanding the Difference

between Stocks and Flows
Our first stop toward understanding what has happened to entre-
preneurship in America is a discussion of measurement. Specifically,
we need to think about tracking two kinds of measures—stocks
versus flows—and two types of businesses— employers and non-
employers. I realize that this is a bit academic for some people, but
trust me, understanding these differences is important, even if the
discussion is a bit dry.
Let’s start with the difference between stocks and flows. A “stock”
refers to how much of something is present at a point in time, and
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THE GOOD NEWS
a “flow” refers to the rate of change in that stock. Take water in your
bathtub as an example. If you fill your bathtub with water, the “stock”
is the level of the water in the tub—the line across the side of the tub
that the water has reached. The “flow” is the rate at which the water
comes out of the tap. (Another flow is the rate at which the water
goes down the drain, which will become important in a minute.)
If you want to know whether your bath is ready, both the stock
and flow measures are useful. If the level of water in the tub—the
stock—is very low, say one inch, your bath isn’t ready yet. Similarly,
if only a tiny trickle of water is coming out of the tap—the flow—
that is also a negative indicator. The two measures capture different
things, but both are useful.
So far we have discussed two key bathtub measures, the amount
of water coming out of the tap (a flow) and the level of water in the
tub (a stock). But there is a third measure that is mathematically
related to the other two, and that’s the flow of water down the drain.
The level of water in the bathtub is a function of the amount of wa-
ter coming out of the tap and the amount going down the drain. As
anyone who has taken a bath knows, the level of water in the tub goes
up if more water comes out of the tap than goes down the drain, and
the level goes down if the opposite is the case.
This is where the other flow measure, the rate at which the water
swirls down the drain, becomes important. The level of water in the
tub is a function of the relative rates at which water enters and drains
from the tub. Boost the flow out of the tap or reduce the flow down
the drain, and the level in the tub will rise.
The patterns are just as true for measures of entrepreneurship as
they are for measures of the water level in a tub. Some measures are
stocks—for example, the per capita number of companies operating
in the economy or the self-employment rate. These measures tell
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THE GOOD NEWS
you how much entrepreneurship there is at any point in time. We

can look at differences in these measures over time just as we look at
differences in the water level in our tub. If the self-employment rate
today is one-third higher than it was a decade ago, or if the per capita
number of businesses in operation is 10 percent lower than it was five
years earlier, then we know something about changes to the amount
of entrepreneurship in the economy.
Other measures are flows. Like the water coming out of the tap
(or going down the drain), they tell us about the rate of new busi-
ness creation (or failure). If the rates of new employer firm formation
are down 50 percent from what they were thirty-five years ago, it
also tells us something about entrepreneurship. But it doesn’t tell us
whether there are more or fewer employer businesses in operation
today than a decade ago. That’s because the measure does not tell us
anything about the fraction of employers that go under each year.
The per capita number of businesses with employees in opera-
tion at any point in time is mathematically related to the rate of new
employer firm formation—the measure that Hathaway and Litan
found had fallen by 50 percent over the past thirty-six years—and
the rate of employer firm failure. Just as with water in a bathtub, a
50 percent decline in the rate of new employer firm formation could
mean that the per capita number of employer businesses is down,
that this number has remained the same, or even that it has actually
risen. We can’t know which has occurred from just the change in the
new employer firm formation rate.
The fact that there are three possible patterns that result from a
decline in the new employer firm formation rate—an increase, no
change, or a decrease in the stock—means that we need to look at
the data on the stock of employer businesses and the employer firm
failure rate.
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THE GOOD NEWS
What Has Happened to Employer Firm Failure Rates?

Let’s go back to the BDS data and compare employer firm stocks
and flows. We know from chapter 1 that the per capita rate of new
employer firm formation went down by 50 percent between 1977 and
2013. But what has happened to the stock of employer businesses? It
turns out that the per capita number of employer firms was 3 percent
higher in 2013 than it was in 1977. Since a 3 percent increase is very
small, let’s just round it to no change. For the per capita rate of cre-
ation of new employer firms to have declined, while the per capita
number of employer firms has remained the same, the per capita
failure rate of employer businesses must also have gone down. Less
flow into the tub was offset by less flow down the drain.
It is, in fact, what has happened. The per capita rate of busi-
ness failure has fallen from 2.44 employer firm closures per thousand
Americans in 1977 to 1.35 in 2013, a roughly 45 percent decline. The
trend is very noisy. It tends to increase in economic downturns, ris-
ing to 2.19 during the Great Recession, and decrease in economic
expansions.3 But the pattern is a long-term decline.
I described the failure rate in a way comparable to the new firm
formation rate and the per capita number of employers in operation
at any point in time. But I could have described it as a percentage of
the number of employer businesses in operation. The pattern is very
similar. The rate at which employer firms fail has gone from 15.7 per-
cent of employers in 1977 to 7.9 percent in 2013, a roughly 50 percent
decline in the business failure rate.4
Over the past thirty-six years, new employer firm formation
rates and new employer failure rates have both declined. In fact, the
two are fairly highly correlated. Between 1977 and 2013, the rate at
which new employers were founded annually in the United States
has a 0.62 correlation with the rate at which employers go under.
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THE GOOD NEWS
Although that is far from a perfect statistical association—a correla-

tion of 1.00 means that two numbers move in perfect concert—it is
enough to suggest that the two numbers are related. Put simply, in
years when more American employers shut down, more American
employers tended to get started, and in years when fewer American
businesses shut down, there were also fewer startups.
While that concept might seem surprising to some people, it
does makes sense. When existing companies go under, markets be-
come underserved, creating opportunities for entrepreneurs to start
new businesses to meet the demand in the newly underserved mar-
kets. Moreover, when businesses shut down, they free up capital,
labor, land, machinery, and so on for new businesses to employ with-
out having to pay a premium to bid those resources away from more
established players. Without these exits releasing the resources, those
assets would be too difficult or expensive for the startups to obtain.
In contrast, in times when existing businesses aren’t shutting down,
neither demand nor resources are being freed up for entrepreneurs
starting new businesses.
To make this concept more concrete, let me give an example.
Suppose you live in a suburb of a mid-sized American city. Every
suburb in America has some dry cleaners, pizza parlors, and shoe
repair shops. For the most part, the number of dry cleaners, pizza
parlors, and shoe repair shops is proportional to demand for those
products. Sure, in Southern California flip-flop land, there are fewer
shoe repair shops per capita than in Boston, and in New York there
are probably more dry cleaners per capita than in El Paso, but there is
a relatively stable ratio in each place over time. It is hard for a would-
be business owner to start an additional pizza parlor, dry cleaner, or
shoe repair shop in a given neighborhood if the number of existing
establishments satisfies demand.
35
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THE GOOD NEWS
What this means is that to allow entrepreneurs to start more new

employer businesses, more existing employer businesses need to shut
down. But we cannot know for sure the direction of the causality
here. Does the decline in the failure rate cause the startup rate to
decline, or does the decline in the startup rate cause the failure rate
to fall? Or both?
One plausible explanation is that the declining failure rate causes
the startup rate to decline. The theory is that the economy has a
carrying capacity. It can handle only so many businesses. If existing
employer businesses become less likely to go under, as they have,
it becomes more difficult for entrepreneurs to start new businesses.
That makes the pace of new employer firm formation slacken, which
is what we observe. Compared to 1977, in 2013, the rate at which
existing businesses went under declined. So there was less space for
startups to form.
This argument has received some support among some econo-
mists. In a longitudinal study of Canadian manufacturing compa-
nies, economists Avid Pe’er of Rutgers University and Ilan Vertinsky
of the University of British Columbia found evidence for this story.
Using a wide variety of statistical techniques to control for poten-
tially confounding factors, Pe’er and Vertinsky found that in places
where more existing businesses shut down, business formation rates
increased. In areas where fewer existing businesses were shuttered,
business formation rates declined.5
Moreover, data from the 2014 Global Entrepreneurship Monitor,
a cross-national comparison of business formation and discontinua-
tion rates across sixty-nine countries, gathered as part of an annual
effort by researchers at a wide variety of business schools to measure
entrepreneurial activity across the globe, provide similar evidence.
These data reveal that the total entrepreneurship activity rate—the
36
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THE GOOD NEWS
fraction of a nation’s adult age population that is either starting a

business or is the owner-manager of a new business— correlates 0.81
with the country’s discontinuation rate—the fraction of the adult-
age population that has shut down a business. Countries that have
a high rate of business failure tend to have a high rate of business
formation, and countries that have with a low rate of business dis-
continuation rates tend to have lower startup rates.
What about the failure rate of new businesses? Have those de-
clined as well? If existing businesses are failing less often, one might
think that the failure rates of new businesses would do the same,
because entrepreneurs are getting more selective in founding startups
and at managing them. The data, however, don’t suggest that pat-
tern. Economists Ian Hathaway and Robert Litan—the ones who
identified the decline in the new employer firm formation rate—
have found that new firms experienced a jump in failure rates be-
tween 1987 and 2007, but that employer firms more than one year
old did not experience much of a change in failure rates over this
period. This pattern, they explain, is present across industrial sectors,
geographies, and firm sizes.
If we look at the failure rate of businesses in their first year of
operation since 1977, we can see that the effect is more muted, but it
is still there. The failure rate of new businesses has risen slightly over
the past three-plus decades, while the failure rate of existing busi-
nesses has fallen. New businesses are more likely to go under than
they were three decades ago, but mature ones are less likely to fail.
The correlation between employer firm formation and failure
rates suggests that another measure of entrepreneurship, the stock of
employer businesses, may be doing all right. A look at the census data
suggests that is the case. The per capita number of businesses with
employees was 3 percent higher in 2013 than it was in 1977. In 1977,
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THE GOOD NEWS
there were 15.52 businesses with employees for every American. In

2013, that number was 15.99.6
If you think of our bathtub analogy for a minute, you will see
why. The number of employer businesses per capita is like the level of
water in a tub. The level is pretty much the same because the amount
of new businesses going down the drain and the amount coming
from the faucet were both about 50 percent lower in 2013 than they
were in 1977.
Together, these data tell us that American entrepreneurs may be
less likely to start new businesses with employees than they once were
because existing employers are less likely to fail. This suggests that
the economy has a carrying capacity for new businesses. If existing
entrepreneurs are able to keep their businesses alive longer, fewer
people are starting new employer firms to replace them. That’s an
interesting story, but it is not one of American entrepreneurship in
decline.
The No-Decline Story Told by Other Measures

Before we accept that American entrepreneurship is in long-term
decline, we should look at some other data. Several measures tell a
different story from that of the Census Bureau data on new employer
firm formation rates. The Federal Reserve’s Survey of Consumer Fi-
nances is one. Every three years, the Federal Reserve board of gov-
ernors contracts with a reputable firm, like the National Opinion
Research Center (NORC) at the University of Chicago, to survey
the financial position of U.S. households. It is an expensive govern-
ment study that yields very high quality data employed by numerous
scholars and policy makers.
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THE GOOD NEWS
One of the things the Survey of Consumer Finances captures is

the share of U.S. households that owns “business equity,” which the
Federal Reserve defines as an ownership interest in privately held
sole proprietorships, partnerships, or corporations. (Business equity,
by this definition, does not include investments in the stock mar-
ket.) It is a reasonable measure of the fraction of American families
that own private businesses—something many people would call
“entrepreneurship.”
Although the fraction of households with business equity slipped
between 2010 and 2013, the survey data do not show a long-term
downward trend. In both 1989 and 2010, the same percentage of U.S.
households—11.3 percent—held business equity.7 Unlike the Census
Bureau data on new employer firm formation, and consistent with its
measure of new employer firms per capita, the Federal Reserve data
do not show a long-term trend toward less entrepreneurship in the
United States. Instead, they show that it has been pretty stable.
Rob Fairlie, an economist at the University of California at
Santa Cruz, created another measure of the stock of entrepreneur-
ship for the Ewing Marion Kauffman Foundation, a nonprofit that
supports academic research on the topic. The Kauffman Index of
Entrepreneurial Activity, as it is called, is produced from the Current
Population Survey, a representative sample of the U.S. population col-
lected jointly by the U.S. Census and BLS. Fairlie’s analysis captures
the fraction of the population that transitions into self-employment
every month. The Kauffman Index of Entrepreneurial Activity was
identical in 2014 and 1996, a pattern that belies the claim that the
rate of entry into entrepreneurship is in decline (figure 2.1). Visual
inspection of the trend line shows that, to the extent that there is any
pattern at all, it is a slight increase over time.
39
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THE GOOD NEWS
Figure 2.1. Percentage of Non-Business Owners Starting Businesses

Source: Created from data from the Kauffman Index of Entrepreneurial Activity.
The Story of Rising Entrepreneurship

We have seen several sources that disagree with the new employer
firm data on what has happened to entrepreneurship in the United
States. Data on the stock of employer businesses, the Survey of Con-
sumer Finances business equity holdings, and the Kauffman Index of
Entrepreneurial Activity show little trend over the past few decades.
However, other data show that entrepreneurship has actually
been rising. Consider the Census Bureau’s non-employer data. This
series is an annual measure of the number of the U.S. companies
that have no paid workers. To be precise, the Census Bureau’s non-
employer data measures include businesses that have no employees
on the payroll but have produced at least $1,000 in annual revenues
and are subject to federal income tax. Non-employer businesses in-
clude both part-time and full-time entrepreneurial endeavors. The
non-employer business can be the primary job of its owner or a sec-
ondary one, and it can take on a variety of legal forms, from sole
proprietorship, to partnership, to Subchapter S or C corporations.
40
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THE GOOD NEWS
Although the number of non-employer firms did slip a little

during the depths of the Great Recession, their count has generally
been rising in recent years. Moreover, over the past fifteen years,
the number of non-employers has grown faster than the population,
leading to a rise in the per capita number of American non-employer
companies. Between 1997 and 2013, the stock of American businesses
without employees increased by 76 percent, five times faster than the
15 percent increase in the population. As a result, the per capita num-
ber of businesses without employees rose from 56.57 per thousand
people to 72.72 (figure 2.2).
The Internal Revenue Service produces several statistics that
let us know what has happened to entrepreneurial activity over
time. One such number is the fraction of American taxpayers who
take the self-employment tax deduction. Because people can take
this tax deduction only if they are actually in business for them-
selves, it is a good indicator of how many individual income tax fil-
ers are self-employed. Some observers believe that this measure of
Figure 2.2. Number of Non-Employers per Thousand People

Source: Created from data from the U.S. Census.
41
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THE GOOD NEWS
self-employment is better than that produced by other government

agencies. When it comes to tax data, most people provide the re-
quired information and answer honestly. Although they are legally
obliged to answer inquiries from all federal agencies accurately as
well, few people have been prosecuted for failing to give accurate data
to the Bureau of Labor Statistics. The same cannot be said for giv-
ing false information to the IRS. The IRS’s data on self-employment
are probably the best we have on the question of how many people
are working for themselves—better, in fact, than the BLS data that
combine incorporated and unincorporated self-employment.
As we saw in chapter 1, the BLS data on the overall self-
employment rate show that the fraction of Americans in business
for themselves has essentially been flat for the past several decades.
The IRS data on this question cover a shorter period than the BLS
data, but for the period where the two measures overlap, the IRS
numbers tell a story consistent with rising, not falling, rates of entre-
preneurship. The fraction of American households that took the self-
employment tax deduction on their individual income tax returns
increased from 9.7 percent in 1990 to 12.8 percent in 2013 (figure 2.3).
This hardly suggests declining entrepreneurship.
Some people don’t like self-employment as a measure of entre-
preneurship because it confounds being an independent contractor
with running a business. So the IRS data on self-employment might
simply show a rise in independent contractors, not more entrepre-
neurship. Rather than debate this point, let’s just look at some other
measures of entrepreneurship from the tax authority’s data.
Since 1980, the tax authority has tracked the number of pass-
through entities—sole proprietorships, partnerships, and Subchap-
ter S corporations—in the U.S. economy. This measure shows en-
trepreneurship on the rise. Over the past three decades, the number
of pass-through entities has increased much faster than the number
42
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THE GOOD NEWS
Figure 2.3. Share of Individual Tax Returns with

Self-Employment Tax Deduction
Source: Created from data from the Internal Revenue Service.
of Americans. In 1980 there were 57.2 American businesses for ev-

ery thousand Americans. By 2012, there were 104.4. While the 2012
figure is below the peak of 106.5 in 2007, it is nearly double its per
capita level in 1980 (figure 2.4).
Other IRS data show a similar pattern. The tax authority keeps
track of the number of individual tax returns that show income and
losses from business ownership. Like the Federal Reserve data on
households with business equity, this statistic captures the portion
of individual tax filers that run a company. Comparing these figures
to the total number of individual returns tells us about the fraction
of entrepreneurs in the economy. This measure also shows a rising
pattern. The percentage of individual income tax returns with busi-
ness income or loss rose to 16.0 percent in 2013, from 12.9 percent in
1990 (figure 2.5).
This rise in entrepreneurial activity has been widespread. Busi-
nesses taking several legal forms have increased in absolute numbers
and per capita. This means that the growth in entrepreneurship is
43
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Figure 2.4. Business Returns per Thousand People
Figure 2.5. Share of Individual Income Tax

Returns with Business Income or Loss
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THE GOOD NEWS
not just a shift from one legal form of business to another. Propri-
etorships, partnerships, and corporations all increased on a per capita
basis over the past three decades. The number of sole proprietorships
per capita has shown a steady, almost linear increase over the past
thirty years. While the number is down from its peak of 76.75 in
2007, from 1980 to 2013 the number of sole proprietorships per thou-
sand Americans nearly doubled, from 39.22 to 76.15 (figure 2.6).
Corporations display a similar pattern. In this category, which
includes both traditional C corporations and Subchapter S corpora-
tions, the number rose more or less steadily from 1980 until 2006,
when it peaked at 19.58 per thousand Americans. Although there has
been a dip since then, the per capita number of American corpora-
tions was 56 percent higher in 2012, the latest year for which data are
available, than in 1980 (figure 2.7).
Figure 2.6. Sole Proprietorships per Thousand People

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THE GOOD NEWS
Figure 2.7. Corporations per Thousand People

Figure 2.8. Partnerships per Thousand People

The growth in the per capita number of partnerships is less linear

than that of the other two business forms, but the pattern persists
(figure 2.8). The per capita number of partnerships was much higher
in 2012 than it was in 1980, rising from 6.06 per thousand people to
10.79 per thousand, a 78 percent increase.
46
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THE GOOD NEWS
In short, no matter how we measure businesses, we have seen a

rise in the number of companies per American over the past three
decades. That pattern is inconsistent with a decline in entrepre-
neurship.
1. Business failure rates have fallen since the late 1970s, in-
creasing the amount of time that the average entrepreneur
runs any given business.
2. The per capita stock of businesses with employees has re-
mained roughly constant since 1977.
3. Employer failure and formation rates are positively cor-
related.
4. The number of non-employers per capita rose between
1997 and 2013.
5. A higher fraction of American taxpayers took the self-
employment tax deduction in 2013 than in 1990.
6. The fraction of individual income tax returns with busi-
ness income or loss increased between 1980 and 2013.
7. The per capita number of businesses increased between
1980 and 2013.
8. The per capita number of sole proprietors, partnerships,
and corporations has increased in all cases since 1980.
Taken together, these data tell a different story about trends in

American entrepreneurship from the one told in chapter 1. Both the
formation rate and the failure rate of companies with employees have
fallen significantly over the past thirty-plus years, but the stock of
employers is roughly the same today as it was in the late 1970s, in
proportion to the population.
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THE GOOD NEWS
Other measures of the stock of entrepreneurs also contradict the

story of decline. The fraction of households reporting to surveyors
that they hold business equity was the same in 1989 and 2010. The
Kauffman Index of Entrepreneurial Activity was the same in 2014 as
it was in 1996.
Several data sources indicate that entrepreneurship has gone up
over the past three decades. Non-employers have grown on a per
capita basis since the late 1990s. The percentage of taxpayers tak-
ing the self-employment tax deduction and paying self-employment
taxes has gone up. The per capita number of American businesses has
risen in all categories of businesses, from proprietorships to partner-
ships to corporations. And more American taxpayers have business
income or loss on their individual tax returns.
In short, looking only at the data on the rate of creation of em-
ployer businesses gives one a misleading picture of American entre-
preneurship. It isn’t in decline, but it has changed.
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THREE
Entrepreneurial Earnings Are on the Rise
In the last chapter, we saw that, despite the arguments of some

observers that American entrepreneurship is in decline, the data show
that only some types of entrepreneurship are lower than they were in
the late 1970s. There is no doubt that new businesses with employees
are being created at half the rate they were a generation or so ago,
that unincorporated self-employment is down, and that people who
lose their jobs and are receiving outplacement services (at least the
services of Challenger, Gray and Christmas) are not as interested in
starting businesses as their 1980s counterparts were.
But other types of entrepreneurial activity are on the rise. America
has many more non-employers per capita than it did several decades
ago. Incorporated self-employment rates have increased. A greater
fraction of taxpayers show business income or loss on their individual
tax returns, and we have far more companies of all types—sole pro-
prietorships, partnerships, and corporations—per person than we
did thirty-plus years ago.
Moreover, even the data on employer businesses are equivocal.
Entrepreneurs are founding businesses with paid workers at a slower
rate than they once were, but older employer businesses are shut-
ting down more slowly, leaving the stock of employers per capita
slightly higher now than in the late 1970s. Because incorporated and
unincorporated self-employment have moved in opposite directions,
49
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ENTREPRENEURIAL EARNINGS ARE ON THE RISE
the overall self-employment rate is similar to what it was before the

advent of the personal computer, but today a greater fraction of the
self-employed are incorporated.
These trends tell a complex story of what has happened to en-
trepreneurship in America. Most of the stories told by pundits and
policy makers—about lack of access to capital, demographic shifts,
stifling regulation, and high taxes—are too simplistic to explain ac-
curately what has happened to entrepreneurship since the late 1970s.
But before I attempt my own explanation, I need to highlight two
other trends that many have missed: what has happened to earnings
from business ownership, and what has happened to high-potential
ventures.
In this chapter, I focus on the first of these, profits from running
one’s own business. The data on earnings from business ownership
indicate that American entrepreneurs are doing just fine—better, in
fact, than people who do not run their own companies. Entrepre-
neurial activity has become more, not less, profitable over time. And,
as running a business has become more profitable, the incomes and
net worth of business owners have grown faster than those of people
who work for others.
American Entrepreneurs Are Making More

Money Than a Generation Ago
The hypothesis that American entrepreneurs are making less
money than they once did is straightforward and easily testable.
Their average income is either the same, higher, or lower than it was
three-plus decades ago. We can figure this out by looking at how
much money the average American small business has made every
year in real—that is, inflation-adjusted—terms. Data on this are
available from 1980.
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Almost all American small businesses are organized as pass-

through entities. Unlike C corporations, which pay their own income
tax, the income from a pass-through entity is transferred directly
onto the owner’s individual tax return. These companies represent
all but the very largest small businesses—the handful organized as
C corporations. The annual income of pass-through entities thus
tells us how much money American entrepreneurs are making each
year (or at least provides a decent approximation).
The data on these earnings come from our nation’s tax author-
ity, which imposes steep penalties for lying on one’s return, making
the numbers very reliable. If we look at the IRS data on the average
American pass-through business’s income over time, we can get a
pretty good sense of whether entrepreneurship is getting more profit-
able, or less.
The average business run by an American entrepreneur is gen-
erating more income, adjusted for inflation, than it did three de-
cades ago. With the exception of the years of the Great Recession,
which adversely affected entrepreneurial earnings, as it did all other
earnings, the average income of pass-through entities has seen a
steady rise. Between 1980 and 2012, earnings of the average American
pass-through entity rose 196 percent after accounting for inflation
(figure 3.1). That’s far from a marginal increase. American entre-
preneurs are making a whole lot more money than they did a genera-
tion ago.
It is not true just for the entrepreneur who chose to organize
his or her business as a corporation, or partnership, or sole propri-
etorship. If we look at specific types of businesses, we see the same
patterns. The real average net income of Subchapter S corporations
has risen considerably over the past three-plus decades, from $12,239
(again, in 2010 dollars) in 1980 to $107,527 in 2012 (figure 3.2). That’s
51
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Figure 3.1. Real Average Net Income of Pass-Through Entities
Figure 3.2. Real Average Net Income of S Corporations

Y7322.indb 52 1/17/18 10:56:38 AM

a nearly ninefold increase, and it comes despite the battering these

incomes suffered in the Great Recession.
Because the IRS is not terribly concerned about how quickly it
produces its statistical data, some of its numbers are more current
than others. Its information on sole proprietors is more up to date
than figures on other legal forms of business. That’s a good thing.
Because sole proprietors comprise roughly three-quarters of all U.S.
small businesses, statistics about them tell us the most about how
American small business owners are performing.
The data on sole proprietorships’ profit margins show that sole
proprietors are taking home a larger share of their revenues as profits
every year. Once again, that’s inconsistent with the story that Ameri-
can entrepreneurs are earning less than they used to. If American
entrepreneurs are struggling, their average net income as a fraction of
revenue should be going down—they should not be taking a greater
portion of their revenues as profits.
As you might expect, the Great Recession was not kind to
sole proprietors. But overall, sole proprietors’ margins have been
trending upward since the late 1980s. From 1988 to 2013, net income
as a percentage of revenue rose from 18.8 percent to 22.5 percent
(figure 3.3).
And margins have risen not just for sole proprietors. For Sub-
chapter S corporations, net income as a percentage of revenue has
also increased substantially. In 1980, profit margins were 1.2 percent.
In 2012, they had reached 7.2 percent, a sixfold increase. Partner-
ships tell the same story. Since 1980, their net income as a percentage
of revenue went from 3 percent to 16.6 percent, a five-and-a-half-
fold rise.1
In short, American entrepreneurs are making more money than
they were a generation ago. The income for all types of pass-through
53
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Figure 3.3. Proprietors’ Net Income as a Percentage of Revenue

entities is up substantially in inflation-adjusted terms. Sole proprietors

and Subchapter S corporations have seen their margins increase. These
changes suggest rising, rather than declining, entrepreneurship.
The Benefits of Business Ownership

Since the late 1970s, owning a business has become more profit-
able for Americans. Because business ownership not only remains
one of the best ways for Americans to earn money and build a nest
egg but has become an even better way to do so, one would expect
that America’s entrepreneurs have increased their financial advantage
over non-entrepreneurs in the past several decades. A very reliable
source— our nation’s central bank— confirms that they have. The fi-
nancial position of American entrepreneurs has improved relative to
that of non-entrepreneurs.
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The Federal Reserve’s Survey of Consumer Finances, which I

mentioned in chapter 2, tells us a great deal about the differences
in income and net worth between American families headed by
someone in business for him- or herself and families led by some-
one who works for another person. It shows that both the income
and net worth of entrepreneurial households have outpaced those
of non-entrepreneurial households over the past twenty-five years.
Let’s look first at income. The median income of families headed by
a self-employed person grew by 88.3 percent between 1989 and 2013,
compared to 76.9 percent for those headed by someone employed by
someone else. Average income also grew faster: 126.2 percent versus
111.5 percent (figure 3.4).
It should not come as a surprise that the net worth of entre-
preneurial households has, like their income, grown faster than that
of non-entrepreneurial households. The net worth of the typical
American household headed by a self-employed person rose 111.5 per-
cent between 1989 and 2013, while that of the typical family headed
Figure 3.4. Household Income of Self-Employed People Compared

to That of Employees, 1989 –2013
Source: Created from data from the Federal Reserve.
55
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Figure 3.5. Household Net Worth for the Self-Employed

Compared to That of Employees, 1989 –2013
by an employee increased by 63.2 percent. The pattern was the same

for the average net worth. From 1989 to 2013, the average net worth
of an American household headed by someone employed by another
person increased by 176.8 percent. But the average net worth of a
household headed by a self-employed person went up 232.6 percent
(figure 3.5).
These differences have meant that American households run
by someone in business for him- or herself have seen their median
net worth grow faster than inflation, whereas those run by people
working for others have not. We can look at the trends over time
by putting in the survey data from intermediate years. The median
net worth of families headed by a self-employed person increased
from $306,700 in 1989 to $358,900 after inflation, a modest but
clear increase. American families overall, however, saw their median
net worth actually slip over that period, from $84,800 to $81,200
(figure 3.6).
56
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Figure 3.6. Median Net Worth of Self-Employed and All

Families in Thousands of Constant Dollars, 1989 –2013
Since the late 1980s, entrepreneurs have done better economically

than the rest of the American population. The income and net worth
of both the average and the typical American entrepreneur have risen
faster than those of the average or typical non-entrepreneur. Again,
that’s not something that would have happened if American entre-
preneurship were in “decline” or “failing.”
The Entrepreneurial Fraction of Income

Another important trend in recent decades is the rise in the share
of Americans’ income that comes from entrepreneurial activities.
Two very credible data sources, the IRS and the Federal Reserve,
show that far more of American household income comes from en-
trepreneurial efforts now than a generation ago.
The Federal Reserve’s Survey of Consumer Finances shows that
the fraction of family income that comes from “business activity”— its
measure of ownership of private companies—has increased over the
57
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Figure 3.7. Entrepreneurial Income as Percentage of U.S. Taxpayers’ Income

past twenty-four years, from 10.9 percent of before-tax family in-

come in 1989 to 12.7 percent in 2013. That’s a sizable rise.2
The IRS data—again, arguably the most accurate source—show
a similar increase. In 1977, only 5.4 percent of American taxpayers’
income was “entrepreneurial income,” which is defined as income
from Subchapter S corporations, partnerships, or sole proprietor-
ships. By 1982, that share had fallen to 2.6 percent. But over the sub-
sequent years, this fraction has risen substantially, reaching 9.2 per-
cent in 2013 (figure 3.7).
Has this rise in the share of entrepreneurial income primar-
ily accrued to high-income earners, or has it been garnered by low
and middle earners as well? Data collected by Emmanuel Saez of
the University of California at Berkeley and Thomas Piketty of the
Paris School of Economics can help us answer this question. These
two economists, now famous for their work on income inequality,
studied how the source of American taxpayers’ income has changed
across levels of income distribution.
Their data show that the share of entrepreneurial income has risen
most among people at the top of the income distribution. Between
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1982 and 2013, for the top 10 percent of earners among American
taxpayers, the share of total income that came from entrepreneur-
ial activities rose from 5.1 percent to 17.3 percent. For those in the
top 1 percent, the fraction increased from 8.2 percent to 31.3 percent,
and for the top one-tenth of 1 percent, it grew from 8.0 percent to
39.2 percent. For the lucky few in the top one-hundredth of 1 per-
cent, the portion expanded from 12.1 percent to 39.7 percent over the
period (figure 3.8).
Because a rising share of Americans’ income comes from entre-
preneurial activities, it should not be surprising that an increasing
share of their net worth consists of equity in entrepreneurial efforts.
Figure 3.8. Share of Entrepreneurial Income by Income Level

Source: Created from data from Emmanuel Saez and Thomas Piketty, “Income Inequality
in the United States, 1913 –1998,” Quarterly Journal of Economics 118 (2003): 1–39; tables
and figures updated to 2015 Excel figures; see link at http://eml.berkeley.edu/~saez/.
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Figure 3.9. Business Equity as Share of Americans’ Wealth

Statistics from the Survey of Consumer Finances show that the frac-
tion of net worth that comes from “business equity” holdings has
risen over the past two-plus decades (figure 3.9). In 1989, 26.7 per-
cent of Americans’ net worth came from business equity; by 2013, it
was 30.7 percent.
These days, Americans are getting more of their money from
their entrepreneurial activities than from wages, investments, or
other sources than they were three decades ago. Data from two very
reputable sources— our nation’s central bank and its tax authority—
make this pattern abundantly clear. It’s true across all levels of the
income distribution, although it is strongest for the wealthy.
Because people generally allocate their time to the form of work
that generates the highest returns and shy away from the types of
activities that generate the lowest financial payoff, this shift sug-
gests that Americans, on average, feel that entrepreneurship makes
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increasing economic sense. Once again, this pattern is inconsistent

with declining entrepreneurship; it is instead suggestive of the activ-
ity ascending.
1. The average income of pass-through entities—sole propri-

etorships, partnerships, and S corporations—nearly tripled
in inflation-adjusted terms between 1980 and 2012.
2. Since 1980, profit margins have risen at S corporations and
sole proprietorships.
3. Between 1989 and 2013, median and average income and
median and average net worth have risen faster in house-
holds headed by a self-employed person than in households
headed by a person employed by someone else.
4. The fraction of before-tax income that American families
received from owning private companies increased between
1989 and 2013.
5. The share of Americans’ taxable income coming from their
entrepreneurial activities more than tripled between 1982
and 2013, a pattern present for the top income levels as well
as the median.
6. The share of the net worth of American households that is
devoted to equity in private companies increased between
1989 and 2013.
The story told in chapter 1 of declining American entrepreneur-

ship was based primarily on the decrease in rate of formation of new
employer businesses. Some observers have claimed that entrepre-
neurship has been in decline for several decades.
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Chapter 2 told an entirely different story. Data from the Census

Bureau, the Federal Reserve, and the IRS show that existing entre-
preneurial efforts are lasting longer, and that the stock of total busi-
nesses in the economy has been growing on a per capita basis.
In this chapter, we looked at entrepreneurial earnings. Once
again, the data are not consistent with the story of entrepreneurship
in decline. The amount of money the average small business owner
makes annually has risen in inflation-adjusted terms since 1980.
Profit margins have gone up since the late 1980s. Both the income
and the net worth of households headed by someone in business
for themselves have grown faster than those of households led by a
person who works for someone else. And entrepreneurial activities
account for a larger share of U.S. households’ income and net worth
than they did three decades ago.
This rise in earnings makes it difficult to believe that Americans’
interest in entrepreneurship has declined. Basic economics tells us
that if having your own company is increasingly profitable, more
people should want to have their own companies.
Taken together, all of these data tell a complex story. Rather
than signaling a decline in entrepreneurship, these statistics show a
change in how people are approaching it. The decline has been lim-
ited largely to new employer firm formation. Moreover, it has hap-
pened because fewer entrepreneurs are starting companies with paid
workers and those who are starting them are not employing as many
people as a generation ago. The fraction of Americans engaging in
entrepreneurial activity, and the fraction of Americans’ income that
comes from these efforts, have both risen.
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FOUR
Riding High
The first three chapters have shown a mixed picture of what has
happened to American entrepreneurship since the late 1970s—at
least for the typical startup. But focusing on typical companies might
not be the right way to go. Most of the impact of entrepreneurial
activity comes from the formation of high-potential businesses—the
Facebooks and Instagrams and Lending Clubs—not the dry cleaners
and clothing shops that dominate government statistics. A minority
of new businesses actually survive over time, and very few ever grow
employment, sales, or assets in a meaningful way. The entrepreneur-
ship that matters, some observers argue, is not the broad swath of
employer or non-employer businesses but the high-potential startups
that are backed by sophisticated investors.
Some economists who have worked with the census data on em-
ployer businesses have found evidence of a decline in high-growth
companies. Ryan Decker, of the Federal Reserve, and three coau-
thors recently looked at the top 10 percent of U.S. employer busi-
nesses and found that the growth rate of all employers in that group
began to slide around 2000, at the same time that the rate of forma-
tion of new employers in the information sector slowed down. Since
2000, the top tenth of companies has still been adding workers, but
more slowly than in earlier years.1
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This is a troubling sign. If the fastest-growing businesses aren’t

adding workers as fast as they used to, employment will suffer. High-
growth employers are, after all, the businesses adding the most jobs.
In fact, this slowdown in hiring, combined with the lower rate of for-
mation of new employers, could portend a slowdown or even stop-
page of entrepreneurial job creation.
But is what Decker and his colleagues measured really what people
mean when they talk about high-potential businesses backed by so-
phisticated investors? I have no doubt that he and his colleagues have
identified a decline in job creation by the fastest-growing 10 percent
of companies, but I think they are measuring something other than
true high-potential companies. The top tenth of employers added
workers at a far faster pace than the typical or average company, but
very few of these companies are the super-high-growth ventures that
obtain external financing from business angels and venture capital-
ists, make the front page of the Wall Street Journal, go public, or get
acquired at sky-high prices. That fate is limited to less than 1 percent
of new businesses.
This chapter focuses on what has happened to companies funded
by venture capitalists and business angels—the kind of companies
that have gone from tiny startup to giant corporation in a few years.
These companies represent the transformational entrepreneurship
that policy makers and economists alike think is crucial to the
economy. Admittedly, the data on these firms are not as good as the
data examined by Decker and his colleagues. The numbers discussed
here don’t come from government statisticians but from private sector
providers gathering information for a different purpose, or from aca-
demics working on smaller budgets. Still, they tell a consistent story.
Simply put, the trends for high-potential ventures do not show
much evidence of a decline in entrepreneurship. They do indicate a
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burst bubble in venture capital at the turn of the millennium, but for
the most part, investment in high-potential ventures is greater now
than several decades ago.
The Measurement Problem

Measuring what has happened with high-potential companies
over time is far harder than tracking the broader set of new employers
and non-employers or earnings from entrepreneurial activity. High-
potential businesses can’t easily be observed ahead of time. New com-
panies do not come with indicators that say “we will grow large” or
“we intend to hire a lot of people”—at least, not reliable ones. Iden-
tifying high-growth companies requires the use of proxy measures.
One proxy measure is to look at businesses financed by external
equity investors like venture capitalists and business angels—people
who are trying to find the startups with the highest potential. These
investors have money at stake, and their own survival depends on
their identifying the startups with the most potential for growth.
Their judgment—at least that of the successful ones—is probably
better than that of observers who aren’t trying to earn a return from
their evaluations.
Venture capitalists are partnerships that raise money from en-
dowments, pension funds, and wealthy individuals and invest that
money in young high-growth businesses, hoping to cash out when
those businesses are acquired or go public. Classic examples include
the firm Sequoia Capital, famous for its financing of Apple Com-
puter and Genentech.
Business angels are individuals who invest their own money in
young businesses. A legendary example is Peter Thiel, who parlayed
a $250,000 investment of his own money in a young Facebook into
over a billion dollars in profit when the social network went public.
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By comparing the numbers of companies getting financed by

these types of investors now versus in the past, and looking at whether
the terms are getting more or less favorable to entrepreneurs, we can
get a picture of the market for this small but important slice of Amer-
ican entrepreneurship. If these investors are funding a rising frac-
tion of these startups, investor terms are becoming more favorable
to entrepreneurs, and the performance of these types of businesses
is improving, then we can infer that investors are bullish on these
companies, and with good reason. This would be evidence against
the argument that American entrepreneurship is going downhill.
There are some limitations, of course, in using investments by
venture capitalists and business angels to measure the number of
high-growth companies. Not all high-growth companies are financed
this way. Moreover, the government does not collect data on venture
capitalists and business angels; private enterprises do. Their goal in
doing so is not to generate data for research and analysis, making the
data they do collect less reliable. Moreover, respondents do not have
to answer private survey takers the way they must respond to the
IRS or even the Census Bureau. They can simply ignore requests for
information, raising the possibility of bias.
There is also the problem of measurement over time. Data col-
lection has become far easier than it once was. Communications and
computer technologies have made it easier to survey people. As a
result, information that was hard to find in the 1980s is easier to ob-
tain today. That means that statistics on venture capital- and angel-
backed companies don’t go back as far as statistics on new employers
and non-employers, and comparisons with the earliest years are a bit
suspect.
But even if the data on high-potential ventures are not as good
as we would like, ignoring what information is available doesn’t help
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us understand what has happened to these startups. We have to make

the best use we can of the information we have. When looking at the
numbers in this chapter, readers should be more skeptical about their
accuracy than when reading numbers from the Census Bureau or the
IRS. But if patterns are overwhelmingly in one direction or another,
even imprecise numbers provide us with some insight into what has
happened to high-potential ventures.
The Number of High-Potential Companies Is Up

If trends in entrepreneurship were measured solely by what’s
happened with venture capital- and angel-backed companies over
the past decade, then our expectations for the future of American
entrepreneurship would look just fine. There is little question that
there are more Facebooks and WhatsApps and Snapchats and Ubers
today than in the 1980s, both in absolute terms and relative to the
population of businesses.
In 2014, venture capitalists poured $30 billion into 3,665 new
companies—both numbers the highest since the bubble year of
2001. Back in 1980, 413 companies received venture capital funding.
Compared to 1980, venture capitalists (VCs) invested nearly fifteen
times the capital in nearly nine times as many companies, accord-
ing to data from the National Venture Capital Association (NVCA),
the industry’s trade association.2 The NVCA reports that the num-
ber of companies receiving venture capital for the first time has also
risen—from 293 businesses in 1980 to 1,410 in 2014.
These numbers aren’t normalized for the volume of companies
in operation. Could it be that more companies are receiving venture
capital now than in 1980 because there are more companies overall?
That turns out not to be the case. Compared to the stock of busi-
nesses with employees and the number of newly formed businesses
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with employees, the number of venture capital-backed businesses is

higher in recent years than it was in the early 1980s. But the pattern is
hardly a smooth upward trend. In 2013, the ratio of venture capital-
backed companies to both new and total employers was roughly half
of its rate in 2000, the peak of the first Internet bubble. Venture
capital-backed companies made up 0.7 percent of new employers
and 0.07 percent of all employers in 2000 as compared to 0.33 per-
cent and 0.03 percent in 2013.3
But the post-2000 figures may just reflect the size of the late 1990s
bubble. A longer horizon tells a different story. The ratio of venture
capital-backed companies to all employers in 1998 was slightly lower
than in 2013, and the ratio of venture capital-backed companies to
new employers in 1998 was the same as in 2013. Moreover, the ratios
in 2013 were more than five times higher than they were in 1980, the
first year for which data are available. In 1980, 1.15 in every 10,000
U.S. employers received venture capital backing. In 2013, 6.7 in every
10,000 did so. Compared to new employers, the rise is even starker.
In 1980, just 0.09 percent of new employers received venture capital
backing. In 2013, that ratio was more than nine times higher, at 0.83
percent (figure 4.1).4 The Internet 1.0 bubble obscured the long-term
Figure 4.1. Venture Capital-Backed Companies as a Share of New Employers

Source: Created from data from the National Venture Capital Association and Census Bureau.
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shift. A far higher fraction of American employers receives venture

capital financing now than in the mid-1980s.
We can also look at the number of angel-backed companies, nor-
malized by comparison to the number of existing and new employer
businesses, by examining figures compiled by the Center for Venture
Research (CVR) at the University of New Hampshire. But note that
these data are not as good as the data on venture capital-backed ven-
tures. First, the CVR does not publish its methodology for tracking
angels, which raises some suspicion in the minds of researchers. One
cannot be sure of the accuracy of the underlying survey of business
angels. Second, the series begins in 2002, after the Internet 1.0 bub-
ble burst. Because the data do not start until after the venture finance
markets rose and then fell, they tell an incomplete story. Neverthe-
less, the ratio of angel-backed companies to the stock of employer
businesses reveals that the trend is rising, at least over the past de-
cade. Almost double the fraction of American employers received
funds from business angels in 2013 as in 2002 (figure 4.2).5
Figure 4.2. Angel-Backed Ventures per Thousand Employers

Source: Created from data from the Center for Venture Research and Census Bureau.
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If we leave aside the venture capital-backed companies, which

are extremely rare, and concentrate on the angel-backed ones, we see
that the pattern is the opposite of what Decker and his colleagues
found. High-growth entrepreneurship measured as Decker and his
colleagues calculated it declined in the 2000s, but high-growth entre-
preneurship measured by angel data rose. Data like those presented
in figure 4.2 make it difficult to believe high-growth entrepreneur-
ship is really in decline. At best, the evidence is contradictory.
The Number of Financiers

Another way to look at what happened with angel- and venture
capital-backed companies is to examine the number of people financ-
ing them and the amount of money they have spent. If the number
of investors and the amount invested is trending in the same direc-
tion as the number of ventures receiving financing, then we can have
more confidence in our assessment of whether entrepreneurship is
in decline.
Let’s look first at venture capital firms. The data on the amount
of money coming from venture capitalists and the number of people
doling it out tell the same story told by the statistics on the number
of companies receiving financing: a bubble around the turn of the
millennium, followed by a burst and then no particular trend. These
data also show that there is more venture capital activity now than
there was three-plus decades ago.
Looking at the amount of money, in 2008 dollars, venture capi-
talists committed to young companies every year since 1980, we see
that VCs invest far less today than what they put into these busi-
nesses in 2000 —$27.3 billion in 2014 versus $126.8 billion in 2000
(figure 4.3). But the amount venture capitalists put into young com-
panies in 2014 was still more than five times the amount in 1980.6
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Figure 4.3. Venture Capital Commitments (in billions of 2008 dollars)

Source: Created from data from the National Venture Capital Association.
The dotted line in the figure—the ten-year moving average— offers

a smoother version of what has happened over time: a rise and then
a decline. No matter how you look at the figures, the amount of
venture capital investment in American companies is higher today,
in constant dollars, than it was several decades ago.
The data on venture capital funds are similar. There was a rise
and a decline, but the current level is far higher than that of the
1980s. Venture capital funds peaked during the Internet 1.0 bubble,
hitting a high of 1,852 in 2001, and then declined to 1,206 by 2014
(figure 4.4). The count of firms raising funds maxed out at 1,016 in
2007 and dropped to 803 by 2014. But, once again, both numbers in
2014 were more than eight times higher than in 1980.7
Other figures reflect same pattern. As indicated by the data from
the NVCA, the total amount of capital that venture capitalists have
under management has shrunk from $319 billion in 2001 (measured
in 2008 dollars) to $142 billion in 2014. Yet this figure is more than
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Figure 4.4. Number of Active VC Funds

ten times larger than the $10.7 billion the industry managed in 1980.8
It is also higher than in every year prior to 1999.
The same is true if we look at the capital under management
on a per venture capital firm basis. The average venture capital firm
managed less money in 2014 —$177 million in 2008 dollars—than
in 2001, when it managed $345.1 million. But the average VC firm
manages more inflation-adjusted dollars today than the average firm
managed in 1985.9
The data on business angels, though it has been collected for a
much shorter period of time, tells a similar story. There are more
angels now than in 2002, and more angel money (again in constant
dollars) is invested annually than twelve years ago.
A greater fraction of the population is now making angel in-
vestments. The data from the CVR shows that there was one angel
for every thousand Americans in 2014, up from 0.7 per thousand
in 2002. Angels invested $24.1 billion (in 2010 dollars) in 2014, an
increase of nearly 27 percent from what they put into young com-
panies in 2002.10 The Angel Capital Association, the trade associa-
tion for angel groups, reports that in 1999, there were fewer than
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100 American angel groups. By 2013, that amount had more than
tripled, to 385.11
In short, the number and amounts of angel and venture capital
investments are more consistent with a story of rising business cre-
ation and ownership than a story of decline.
The Exit Outcomes Have Improved

We can also look at the outcomes of investments. If entrepre-
neurship in America is in decline, then a shrinking fraction of com-
panies funded by venture capitalists and business angels should get
acquired or go public. But if entrepreneurial activity is flat or even
improving, we should see a flat or increasing share of investor-backed
companies having successful outcomes.
The data show that the performance of venture capital-backed
startups has lately been on a roll, even though the 115 venture capital-
backed companies that went public in 2014 are short of the record
of 267 in 1999.12 The rise in the number of companies going public
has boosted venture capitalists’ returns on their investments. In 2014,
twenty-year venture capital returns were 35.4 percent per year, more
than three times the return of the S&P 500, according to Cambridge
Associates.13 The American venture capital industry remains the
envy of the world.
A more careful look at the underlying data shows that exits of
venture capital-backed companies are much better now than they
were three decades ago. As indicated by data from the NVCA, there
were 194 acquisitions of venture capital-backed companies in 2014
and 115 initial public offerings (IPOs), compared to one acquisition
and 59 IPOs in 1980.14
High-potential ventures do not show the linear trends seen with
other kinds of entrepreneurship. There was a definite bubble around
2001. But if we look at the times before and after that bubble, we
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see that the period before is lower on all measures, including the exit
performance. There were 238 IPOs and 379 acqusitions of these types
of companies in the bubble year of 2000, a time we might compare
to a hundred-year flood.15 But the flood appears to have altered the
landscape, and the numbers have never returned to their previous
levels.
One of my favorite measures of this trend is to look at exits (the
number of companies that went public or were acquired) as a frac-
tion of investments five years earlier. Since investors use five years
as a rough target period for outcomes, a look across this gap tells
us something about the yield on investments—the proportion of
companies that gave their backers profitable exits. Exits as a fraction
of venture capital-backed companies five years earlier were 21.70 per-
cent in 2014, versus 13.32 percent in 1985 (figure 4.5).16 But this mea-
sure is down from its glory days of the late 1990s.
Whether or not an exit occurred is only part of the picture. We
would also like to know how much money those exits brought in.
Figure 4.5. Exits as a Fraction of VC-Backed Companies Five Years Earlier

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Figure 4.6. Average Value of Exits (in millions of 2010 dollars)

Bigger exits, of course, mean more money for investors and a better
outcome from their efforts to finance new ventures.
Again, we need to ignore the bubble. Exits (in 2010 dollars)
reached an average value of $282.30 million in 2000, but the aver-
age company from which investors cashed out in 2014 was worth
$229.14 million, which is far higher than the $60.47 million that the
average exit raised in 1992 (figure 4.6).17 These figures, like the others
we looked at, show that American entrepreneurship is doing better
now than it was in the 1980s and early 1990s.
The Valuations of Young Companies Have Been Rising

One final piece of information on high-potential ventures
concerns valuations of young companies. The valuation of a business
is the amount that its investors and entrepreneurs agree the company
is worth at the time of the investment. It comes from setting the
terms of the investment—this much money for that many shares in
the business.
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I do not want to make too much of these numbers because they

are based on the weakest data in this entire book. They come from
Cooley, LLP, a Silicon Valley law firm, which aggregates them from
the deals its attorneys have done. I would not hesitate to use Cooley
for legal advice on how to structure my high-potential startup, but
it is a law firm, not a division of the U.S. Census. It has no goal of
gathering representative data. It is simply reporting numbers from
the work it has done.
Furthermore, the key statistic Cooley is measuring is the valu-
ation of investments at “Series A” financings—the first round of
raising capital that a new company undertakes after its seed round. A
tiny fraction of the companies started in the United States every year
get financing, and many that get seed round financing don’t go on
to a Series A round. The sample we are looking at—approximately
400 companies per year—is a miniscule and not terribly representa-
tive portion of young businesses. To add a final caveat, the Cooley
data were first collected in 2004, so they do not yield a very long-
term picture.
Given these limitations, what do Cooley’s data say about startup
company valuations over time? I have calculated the five-quarter
moving average valuation of Series A financings measured in millions
of 2015 dollars (figure 4.7).18 The chart shows that these valuations
have been trending upward; moreover, they have been on a tear since
2013, nearly doubling in just two years.
Use your own judgment as to whether these data are strong
enough to show anything about entrepreneurship. But even if you
think they aren’t very useful, there is one thing they are not telling
us. Nothing in the valuation data suggests that high-potential entre-
preneurship has been declining.
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Figure 4.7. Five-Quarter Moving Average of Series A Valuations

(in millions of 2015 dollars)
Source: Created from data from Cooley, LLP.
1. Venture capital-backed companies account for a much

larger fraction of new and existing employer firms now
than in the mid-1980s.
2. Angel-backed companies account for a larger fraction of
employer firms now than in the early 2000s.
3. Though down substantially from their peaks in 2000, the
number of venture capital funds, the number of venture
capital firms raising new funds, venture capital commit-
ments, and the amount of venture capital under manage-
ment are all higher now than in the 1980s.
4. A higher fraction of venture capital-backed companies fi-
nanced five years earlier has a positive exit, and exit values
are higher now than in the 1980s.
5. The valuations of early-stage companies have risen sub-
stantially since the early 2000s.
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The numbers on high-potential ventures are less reliable and

sparser than the data on more typical startups, but they provide
some insight into what has happened to a particular category of
entrepreneurship. They show that the kind of startups that grow
very rapidly and go public or get acquired by large public businesses
—businesses like Facebook and Snapchat and WhatsApp—have
grown, not shrunk, over three-plus decades. The numbers for high-
potential ventures and of the financial institutions that support their
growth have both risen, even after the massive correction following
the collapse of the Internet bubble at the turn of the millennium.
The number of companies, the number of investors, and the amount
of money raised or invested all show similar patterns: the figures in
2014 are several times higher than those in the 1980s and early 1990s.
Nothing in the data on high-potential ventures confirms the story of
a decline in American entrepreneurship.
So what is going on? Entrepreneurship is not in decline. The
number of high-potential businesses has increased since the 1980s
despite the popping of the Internet 1.0 bubble. The system for fi-
nancing those businesses is correspondingly larger. American busi-
ness owners are making more money than they did in the 1980s,
and more of Americans’ earnings comes from their entrepreneurial
endeavors. A higher fraction of the population is running businesses,
and we have many more businesses per capita than we did three-plus
decades ago. The failure rate of existing small businesses is lower
than it was at the time of Reagan’s “morning in America.”
But all is not rosy. The rate at which Americans are starting com-
panies with paid employees is down dramatically. The next chapter
explains why that decline matters to policy makers and academics,
and why you should care too.
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FIVE
The Implications of Fewer Employer Startups
The strongest evidence of a decline in entrepreneurial activity is

that the rate of new employer firm formation has fallen by half over
the past three-plus decades. That large decline has academics, policy
makers, pundits, reporters, and others concerned. Even if the experts
are wrong about the breadth of the decline in entrepreneurship and
founders are starting businesses without employees in place of those
with paid workers, it is still a problem. New employers are a key
source of employment and productivity growth, and that is one rea-
son why so many observers urge policy makers to intervene to reverse
the decline in the formation of employer businesses.
This chapter focuses on the implications of the decline in the rate
of formation of new employer businesses on the economy. Because a
lower rate of formation of employer businesses adversely affects both
employment and productivity, policy makers need to understand the
true causes of this decline.
The Problem: A Shift to Non-Employers

As we saw in chapter 2, the stock of employer businesses per
capita was slightly higher in 2013 than it was in 1977, but the stock
of non-employer businesses has risen substantially. Have entrepre-
neurs boosted their rate of formation of non-employers, or are non-
employers failing at a lower rate than three decades ago? And did those
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I M P L I C AT I O N S O F F E W E R E M P L OY E R S TA R T U P S
changes occur because entrepreneurs are starting non-employers in

place of employers or are they independent of each other?
It’s difficult to tell exactly what has happened. We lack a mea-
sure of the in-and-out flow of non-employers. The data don’t tell
us whether the rate of creation of non-employers is higher than the
rate of creation of employers, if the failure rate of non-employers is
lower than the failure rate of employers, or both. All we can tell is
that there has been a shift toward non-employers in the mix of small
businesses.
As long as the government has been collecting data on busi-
nesses, most American companies have been non-employers. But
that the pattern has been accentuated over the past two decades. As
the rate of growth of employers has slowed and the rate of growth
of non-employers has accelerated, the fraction of non-employers has
steadily increased.
We can look at a couple of different sources of data for more in-
formation. One is the set of statistics on the stock of businesses with
and without employees collected by the U.S. Census and made avail-
able by the Office of Advocacy of the Small Business Administration
(SBA). Initially in one report in 1992 and then annually from 1997
to 2011, the most recent year of publication, the SBA has provided
the count of employer and non-employer businesses in the United
States on its website. This information allows for an easy calculation
of the fraction of companies with employees as it reveals the decline
in the fraction of employers. The relative growth of the two groups
of companies has meant that the fraction of American businesses
with employees has shrunk from 26.4 percent of the total in 1997 to
20.2 percent in 2011 (figure 5.1). Because virtually all of these compa-
nies are young and small, this transformation means that young and
small businesses are far less likely to have employees now than they
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Figure 5.1. Fraction of U.S. Companies with Employees

were in the late 1990s. Although the 6.2 percentage point decline
may not seem like a lot, it is. The shift amounts to a one-quarter
decline in the share of young and small companies with employees.
The Census Bureau did not begin collecting data on the num-
ber of businesses without employees until 1997. Therefore, its data
alone provide a fairly short period over which to look at the share
of employer businesses. The Internal Revenue Service, however, has
collected data on the number of U.S. businesses—sole proprietor-
ships, partnerships, and corporations—since 1980. By comparing
the number of employer businesses reported by the U.S. Census with
the number of total businesses reported by the IRS, we can see what
has happened to the share of businesses with employees over a longer
time horizon.
The pattern shown by the census data alone is also present in the
comparison of the IRS and census data; the combined data follow
the Census Bureau’s shorter-term numbers. The decline in the frac-
tion of businesses with employees is remarkably large. In 1980, the
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Figure 5.2. Employers as a Fraction of U.S. Businesses Filing Taxes

Source: Created from data from the U.S. Census and the Internal Revenue Service.
employer firm share of total businesses, as measured by IRS data, was

27.7 percent. By 2012, it had fallen to 15.3 percent—a 44 percent de-
cline (figure 5.2). (The IRS reports a lower fraction ratio of employer
firms to total firms than does the U.S. Census because its definition
of a business is more inclusive than that of the Census.)
Another way to look at the data is to compare only IRS data
on small businesses. The tax authority counts the number of pass-
through entities in the economy—sole proprietorships plus Sub-
chapter S corporations plus partnerships. That’s a pretty good ap-
proximation of small businesses, since virtually all of them take one
of these legal forms. In 1980, there were about three such entities
for every employer business in the United States. By 2012, the ratio
had doubled to six-to-one.1 Stated differently, the number of pass-
through businesses has increased faster than the total number of em-
ployer businesses over the past three-plus decades. Non-employers,
it appears, are driving the rise in the number of pass-through busi-
nesses reported on Americans’ tax returns.
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In short, the data on employers and non-employers show that

over the past several decades, non-employers have become a rising
fraction of American businesses. That is important because it high-
lights the problem of looking at the decline in the rate of formation
of new employers as an indicator of the health of American entrepre-
neurship. Because employers are becoming a less prevalent form of
business, the decline in their formation may not be due to a drop in
entrepreneurship. It could simply indicate a shift from employers to
non-employers.
Employment in New Firms Has Dropped

Not only are people in business for themselves less likely to have
paid employees, but fewer people are working in young companies.
The U.S. Census uses different data from the BLS to measure entre-
preneurship. Rather than capture the fraction of the population that
is self-employed, the Census looks at the types of companies people
create. For our purposes, the two main categories are companies with
employees, called employer businesses, and those without paid work-
ers, called non-employer businesses, which we have discussed in ear-
lier chapters.
By definition, only the employer businesses create jobs for oth-
ers. That makes the Census Bureau’s measure of employer firms its
key measure of job creation. The rate of creation of these businesses
was about half its 1977 level in 2013, the latest year for which data
have been released (see chapter 1). That is leading to a decline in the
number of people who are working at new firms.
It is statistically possible, of course, for the number of people work-
ing at new firms to rise even if the rate of creation of new employers
were to fall—if the average new business had many more employees
now than it did three decades ago—but that is not happening. A
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Figure 5.3. New Firm Share of U.S. Employment

much smaller portion of the labor force works for new businesses
today than in the late 1970s. The fraction of the labor force working
for companies less than a year old fell from 5.7 percent in 1977 to
2.0 percent in 2013 (figure 5.3).
Again, we shouldn’t be deceived by the small numbers here. At
no point did brand-new businesses employ a very large portion of
the labor force. What is important here is the size of the change. The
percentage in 2013 is only a little over one-third of the 1977 percent-
age. Even if we allow for the possibility that the 1977 number is an
outlier, the proportion of the labor force working for new businesses
is much lower now than it was. Americans in the 1970s were more
likely to work for new companies.
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It is important to consider where the decline is manifest. Is this

just a drop in employment in companies founded the previous year,
or is it more widespread? The answer, provided by Ryan Decker, an
economist at the Federal Reserve, and his colleagues at the U.S. Cen-
sus and University of Maryland, is that the drop is more widespread
than just a decline in employment in companies in their first year
of operations. Decker and his colleagues show that the fraction of
people working at businesses under five years old has declined since
the early 1980s.2 The labor force is shifting to work at older busi-
nesses as the creation of new employers slows.
It is also uniform throughout the economy. Decker and his col-
leagues find that although the employment decline at young firms
cuts across all sectors, it has been steepest in services and retail. We
will return to the reasons later in the book. For now, it is important
to note that young businesses simply do not employ as many people
as they did in the late 1970s.
Decker and his colleagues also addressed another question: how
much of this decline comes from a decrease in the rate of formation
of new employer firms, and how much is because new companies are
smaller than they once were? Theoretically, the latter could account
for the whole decline in employment. But Decker and his colleagues
show that that is not the explanation. Their careful analysis reveals
that there has been no change in the average initial size of new em-
ployer businesses;3 the average startup employs the same number of
people today as its counterpart of three decades ago. The problem is
that there are fewer new employers.
The cumulative effect of the decreasing startup rate—what
Decker and his colleagues call the “startup deficit”—is to reduce em-
ployment at new businesses not just immediately but in the cohort
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of companies going forward. As each generation of startups is smaller

than the last, the number of jobs created by startups declines. Because
startups increase employment at a higher rate than mature firms, this
decline creates a rising deficit in job creation that slows overall job
growth.
The decline in job creation at new businesses is far from trivial.
Census data reveal that in 2013, new businesses generated 2.2 mil-
lion jobs— down from 3.7 million in 1977.4 This happened even
though the private sector labor force grew from 66.1 million in 1977
to 117.3 million in 2013.5 The private sector labor force increased by
77 percent, yet the number of people working in new businesses has
fallen by 39 percent.
More important, this decline has occurred across the board.
Decker and his colleagues showed that it is present in all major sec-
tors of the economy—though, as mentioned earlier, it is heaviest for
retail and services. It is also present in all fifty states, though greater
in the South and West than in the Midwest and Northeast.6
The pattern is clear: America is creating fewer new companies
with employees than it did three-plus decades ago, and these compa-
nies are employing roughly the same number of people now as then.
The net effect is that new and young companies employ far fewer
workers now than in the late 1970s, and this decline is present across
all industries and all states.
Small Businesses Are Employing Fewer People

The numbers get even more disturbing. The trends in employ-
ment are not limited to new businesses but extend to more mature
companies as well. Fewer Americans work at small businesses than a
generation ago. Jobs are moving away from any businesses that could
be characterized as “entrepreneurial.”
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The Small Business Administration typically defines a small busi-

ness as a company with fewer than 500 workers. Using this cutoff as
our standard, we can look at employment trends at big and small
businesses over time. Between 1990 and 2011, the SBA reports that
small business employment grew by 13.3 percent, and big business
employment increased by more than twice that: 28.6 percent.7
Data from the U.S. Census on the level of employment at big
employers— companies with at least 500 employees—and the small-
est employers—those with between 1 and 19 workers—since 1977
show this pattern quite clearly. The figure sets the level of employ-
ment for both sizes of business at 100 percent in 1977 and shows the
relative level in 2013. In 2013, big company employment was 181 per-
cent of its 1977 level, indicating that it has risen 81 percent since then,
while small company employment was 144 percent of its 1977 level,
showing that it has risen a little over half that, 44 percent (figure 5.4).
Moreover, as you can see from the figure, the pace of hiring at the
Figure 5.4. Relative Growth of Small and Large Business Employment

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biggest and smallest employers began to diverge in the mid-1980s,

with the linear trend for the biggest businesses being much higher
than that for the smallest businesses over that period.
More and more people are working at big businesses rather than
small ones, just as more and more people are working at older com-
panies rather than younger ones. The claim that new and small busi-
nesses are America’s job creators may be growing outdated.
If employment growth has been greater at big businesses than
small ones for over twenty years, it is simple mathematics to conclude
that the small business share of employment must be declining. The
Census Bureau tracks the number of people employed in the private
sector and the size of the businesses where they work in a data series
reported by the SBA. We can look at the fraction of the total pri-
vate sector employment accounted for by businesses with fewer than
500 workers each year from 1987 to 2011. In 1987, businesses with
fewer than 500 employees accounted for 54.5 percent of all private
sector employment. In 2011, the share was down to 48.5 percent (fig-
ure 5.5).8 Since 1988, Americans have shifted from mostly working at
small businesses to mostly working at large ones.
We can corroborate these findings by examining other federal
data. The Census Bureau’s Business Dynamics Statistics database
contains information about the small-company (under 500 employ-
ees) fraction of employment in a series extending from 1977 to 2013.
They show a similar pattern to that shown in the series provided by
the SBA. Businesses with fewer than 500 employees accounted for
52.2 percent of all private sector employment in 1977. The fraction
peaked at 54.8 percent in 1987, and by 2013 was down to 48.4 percent
(figure 5.6).9 Since the late 1980s, big business has been taking an
increasing share of U.S. employment, regardless of whose data we
examine.
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Figure 5.5. Share of Private Sector Labor Force Employed in Small Businesses
Figure 5.6. Percentage of the Private Sector Labor Force

Employed in Small Businesses
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The Productivity Challenge

Productivity is a measure of how much output we get from each
unit of input in the economy. Growth in productivity is a good thing.
It means we are getting better at using our resources efficiently. That
is why policy makers are concerned about the decline in the U.S.
productivity growth rate. We are still getting more productive, but
our pace of improvement has declined. Between 1947 and 1977, U.S.
productivity growth averaged 2.6 percent. But from 1977 to 2016,
a period of substantial decline in the rate of formation of employer
businesses, productivity growth averaged only 1.8 percent.10
Nobel laureate and Arizona State University professor Edward
Prescott and UCLA professor Lee Ohanian believe that the decline
in new employer firm formation rates are at least partially responsible
for the slide in U.S. productivity.11 Prescott and Ohanian do not ex-
plain why this decline in employer firm formation rates has hindered
productivity growth, but other experts suggest several factors. First,
non-employers are a poor substitute for employers when it comes to
economic impact. In 2012, the latest year for which data are avail-
able, Census Bureau figures show that the average small employer in
the United States had revenues of $2,070,000, and the average non-
employer had sales of $45,000. That’s a ratio of 46:1. Non-employer
businesses together only account for about 4 percent of U.S. sales.12
The substitution of non-employer businesses for employer businesses
has dampened down the output side of the productivity equation.
The decline in the rate of formation of new employers and the
shift toward more non-employers in the business population has
meant a smaller pool of the kinds of businesses that engage in sub-
stantial capital investment. Employers spend much more on equip-
ment and structures than non-employers. Census Bureau data show
that in 2013 the average non-employer spent $2,376 on equipment
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and $1,556 on structures. By contrast, the average employer spent

$169,091 on equipment and $107,148 on structures.13
Surveys by the National Federation of Independent Business
(NFIB) show that small businesses have reduced their rate of capital
investment over time. In 2015, the NFIB survey revealed that only
26 percent of small businesses planned to make a capital expenditure
in the next six months. This number is far below the fraction of
41 percent that said they would make such investments in 1996.14
If we match up Federal Reserve figures on the capital expendi-
tures of non-corporate, non-financial businesses (a proxy for small
businesses) with IRS data on the number of sole proprietorships in
the economy, we can see what has happened to capital expenditures
at the average small business over time. The data show that the aver-
age non-financial, non-corporate entity spent far less on equipment
and structures in 2013 than it did in 1980. In 1980, the inflation-
adjusted amount spent by these firms divided by the number of sole
proprietorships in the economy was $96,160 (in 2013 dollars). In
2013, this figure averaged only $14,433.15
The shift to non-employers could account for the slowdown in
innovation we have been seeing in small businesses in recent years.
Data from the U.S. Patent and Trademark Office indicate that small
businesses are less innovative than they were in the late 1980s. The
absence of hiring at small and young businesses could account for
their slowdown in innovation since people are the ones who come up
with the new ideas.
Measuring small business innovation is not easy, and there are
not a lot of indicators of innovativeness that have been collected
over time. But one that has been gathered since the late 1980s is the
fraction of patents granted to small enterprises. In 1988, small busi-
nesses accounted for 28 percent of all utility patents granted in the
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Figure 5.7. Share of U.S. Utility Patents Granted to Small Entities

Source: Created from data from the U.S. Patent and Trademark Office.
United States. By 2015, the small company share of utility patents

had shrunk to 19 percent (figure 5.7).16
The decline in new employer business formation might also
have reduced productivity growth by lowering business dynamism.
Business dynamism —the creation of new companies and the fail-
ure of old ones—is an important way that the economy reallocates
resources to more productive uses. Older, less productive organiza-
tions die off and new, more productive organizations get the capital
and labor that previously went to the organizations that made less
efficient use of those resources.
The decline in new employer business formation might be the rea-
son why we are less productive than we once were, and consequently
why our living standards have stagnated. Entrepreneurs reallocate re-
sources from older, less productive firms to newer, more productive
ones. Not only does this process put capital and labor to better use
but it also keeps existing firms focused on ways to make the most
productive use of their resources.17
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University of Maryland economist John Haltiwanger, an expert

on the contribution of new firms to productivity, explains why. He
writes, “Exiting businesses are less productive than continuing ones.
Furthermore, the data show that, conditional on survival, young es-
tablishments have higher productivity levels and higher productiv-
ity gains than more mature establishments. In effect, the churning
process replaces lower productivity businesses with new, more pro-
ductive ones, thereby increasing productivity in the economy as a
whole. . . . A large fraction of U.S. productivity gains reflect the dis-
placement of low productivity establishments by new establishments
with higher productivity.”18 To Haltiwanger, reduced business dyna-
mism represents yet another way that the decline in new employer
firm formation has hindered U.S. productivity growth.
1. A declining fraction of Americans work in new businesses.

2. The fall in the number of new employers, not the size of
those companies, accounts for this decline.
3. The rate of employment growth at small businesses has
lagged behind that of large companies.
4. As a result, fewer Americans now work in small businesses
than did in the 1980s.
5. Non-employers generate far less in sales and make far less
capital investment than employer businesses.
6. Small businesses now contribute significantly less to tech-
nological innovation than they did in the 1980s.
7. The decline in new employer firm formation has reduced
business dynamism and, according to some economists,
lowered U.S. productivity.
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Over the past three-plus decades, the rate at which Americans

found businesses with employees has fallen by about half. Econo-
mists and policy makers are concerned that this decline has had ad-
verse effects on U.S. labor markets and on U.S. productivity, and
their concern appears to be warranted. The data show evidence of
negative effects of the decline in employer firm formation on both
employment and productivity.
Still, we cannot conclude, as some authors have done, that a re-
duction in the new employer firm formation rate equals a decline in
entrepreneurship itself. That leap makes it difficult to identify the
cause of the problem and solve it. Rather than overgeneralize the
problem and misdiagnose its cause and the appropriate cure, let’s
take a look at likely candidates and how they stand up to the data.
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SIX
It’s Not a Lack of Capital
In chapter 1 I discussed what some observers call the “decline in

American entrepreneurship.” Indicators of this decline include that
the fraction of outplaced executives looking to start businesses has
fallen dramatically since the mid-1980s, the rate of unincorporated
self-employment has been going down since at least the beginning of
the 1970s, and the rate of creation of new businesses with employees
is half what it was in the late 1970s.
These trends have many commentators worried. They have of-
fered up a number of reasons why “American entrepreneurship is
in decline” and have proposed a wide range of “solutions” to the
problem. Over the next several chapters, I will explore each of these
explanations to see which ones best fit the data.
One common explanation for the supposed decline is lack of ac-
cess to capital. This story has two threads to it. First, savings—a key
source of money for business formation—have dwindled. Too few
Americans, the argument goes, have enough money saved up to start
their own companies. Wages are stagnant, and as Barry Lynn and
Lina Khan explain in Washington Monthly, “stagnant wages” mean
that “fewer average families have the savings needed to invest in a
small business.”1 That’s a problem because savings are crucial to busi-
ness creation. Nearly four in five American entrepreneurs (77 per-
cent) report that they financed their new companies at least partly
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I T ’ S N O T A L A C K O F C A P I TA L
with their own savings.2 If would-be entrepreneurs have inadequate

savings to finance business formation, it would clearly reduce the
amount of entrepreneurial activity.
The second thread of argument is that banks have lost inter-
est in financing small businesses. They have raised credit standards,
boosted capital requirements, and simply exited the small business
market. According to one group of observers, this is why startups of
new employers have fallen by 50 percent in thirty-six years.
The Bank Exit Story

The tale begins with the changes in commercial banking. Like
most industries, banking has been much affected by massive tech-
nological changes over the past three decades. Computing—both
in its ability to handle huge amounts of data and in its capacity for
instantaneous communication—has transformed an industry that
was once based on relationships between bankers and small business
owners. Now it is based on algorithms that calculate credit scores and
payment patterns.
Small business lending is a poor fit with this technological revo-
lution because it is harder to automate than consumer lending. Small
businesses are very different from one another, with varied failure
rates and different uses of funds, making common standards much
more difficult to apply. As a result, banks have automated business
loans to a much smaller extent than consumer loans. They are more
expensive to underwrite and service, and they are less amenable to
securitization.
For a bank, large business loans are not much more time-
consuming than small business loans—the approval process and
servicing are largely the same. But simply because they are bigger,
big loans earn more interest than smaller ones and are thus more
profitable. Rising competition in the banking sector has led bankers,
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particularly those running public companies, to concentrate on the

more profitable larger loans at the expense of smaller ones.
The combination of technology and competition has thus led
banks to move out of small business lending. Since 1980, the number
of independent banks in the United States has fallen by half as the
banking industry consolidated.3 The decline has been particularly
severe among community banks, traditionally major lenders to small
businesses. Gone are the days when you could chat up your local
banker for a loan at the country club or your kids’ school function:
most communities no longer have local bankers.
Data from the Federal Financial Institutions Examination Coun-
cil (FFIEC) support this notion of a movement of banks out of the
small business lending market. The FFIEC coordinates five different
banking regulators. Among its many activities, it collects data on
bank loans, including loans to small businesses, which it defines as
those with sales of $1 million per year or less. The FFIEC data show
that the portion of bank credit that goes to small businesses has de-
clined significantly. Between 1996 and 2014 the fraction of all U.S.
business loan volume going to businesses with less than $1 million in
sales fell from 43.1 percent to 34.6 percent (figure 6.1).
Figure 6.1. Small Business Share of Business Loan Volume

Source: Created from data from the FFIEC.
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Data from a different source—the Federal Deposit Insurance

Corporation (FDIC)—show the same pattern. The FDIC captures
a different measure of small business lending. It tracks small non-
residential and nonfarm loans, which it defines as loans of less than
$1 million for both commercial and industrial purposes.
According to both of these measures, small loans have become a
shrinking share of business loan volume over the past two decades.
The small loan share of nonfarm, nonresidential loan value was
52 percent in 1995 but only 24 percent in 2015. The small loan share
of commercial and industrial loans declined from 33 percent in 1995
to 20 percent in 2015 (figure 6.2).
Some observers have argued that the consolidation in the bank-
ing industry has reduced entrepreneurs’ access to capital, which in
turn has depressed the rate at which would-be entrepreneurs start
companies. Barry Lynn and Lina Khan argued in their 2012 Wash-
ington Monthly article that as more and more banks have exited the
small business market, loan officers have lost “the leeway and lo-
cal knowledge to lend to established local businesses, much less new
ventures.”4
Figure 6.2. Small Loan Share of Commercial and Industrial Loan Value
Source: Created from data from the FDIC.
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The obvious solution to this problem, according to the advocates

of this position, is to help American entrepreneurs get access to
capital. Some argue that the government should provide funding to
people who lack sufficient savings. Others suggest subsidizing loans
to make banks more willing to lend money. Easier access to capital,
they claim, will reverse the decline in startups.
But before we spend money on this solution, we should make
sure that the problem actually exists.
Bank Exits Don’t Mean Reduced Access to Credit

I am not convinced. For a decline in bank lending to small busi-
nesses to have caused a decline in entrepreneurship, we need to know
that America’s entrepreneurs are having trouble getting access to
credit. If banks are making fewer loans to small businesses, but those
businesses are getting money some other way, then a shift in banking
lending did not cause a decline in new employer businesses.
Some observers have claimed that new and small businesses are
finding it increasingly difficult to borrow. John R. Dearie, the execu-
tive vice president of the Financial Services Forum, testifying before a
House subcommittee in 2014, said that increased difficulty in obtain-
ing credit “may account, at least in part, for the declining rate of new
business formation. . . . Difficulties in accessing sufficient capital and
credit at reasonable terms can delay or prevent the launch of a new
business, disrupt the further growth and development of an existing
business, or even kill an otherwise healthy and viable business.” He
added that “while securing financing has always been a major chal-
lenge for entrepreneurs . . . circumstances have become significantly
more difficult in the wake of the 2008 financial crisis.”5
It seems plausible that small and new businesses faced tighter
access to credit after 2008, but it was not a problem from 1980 to
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2008. Yet the fall in the rate of formation of new businesses with
employees—the primary evidence for the decline in the rate of en-
trepreneurship—has been going on since the late 1970s.
Every month since 1986, the National Federation of Indepen-
dent Business (NFIB) has surveyed its members to see whether they
borrow at least once a quarter. The NFIB’s January survey shows
that the fraction of small businesses borrowing regularly has recently
declined, from 37 percent in 2007 to 33 percent in 2015. But before
the financial crisis, borrowing by small businesses showed no trend
in either direction. In 1986 and 2007, a similar fraction of businesses
borrowed regularly (figure 6.3).
Other data show the same thing. The FDIC reports that more
small business loans are available now than in the mid-1990s.
Figure 6.3. Percentage of Businesses Borrowing Regularly

Source: Created from data from the NFIB.
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Although the value of those loans has not risen as fast as real GDP,
which increased by 53 percent between 1995 and 2013, the value of
outstanding commercial and industrial loans of less than $1 million,
a common proxy for small business borrowing, has risen in inflation-
adjusted terms over the past eighteen years, reaching $285.8 billion
(in 2011 dollars) in 2013, up from $261.3 billion in 1995.6
Many more business loans are being made now than in the 1990s,
especially when lending is compared to the number of potential bor-
rowers. For instance, a comparison of FDIC data on the number of
commercial and industrial loans of less than $1 million with Cen-
sus Bureau data on the number of employer businesses suggests that
there are far more loans per business in 2013 than there were in 1995.
In the mid-1990s there were about 1.4 loans per company; the most
recent data show 4.5 loans per company.7
If we compare the number of loans with IRS figures on the number
of businesses in the economy, the pattern is similar. In 1995, there were
0.28 loans per IRS-tracked business, and in 2012 there were 0.72.8
Even when we compare the number of loans to the number of
total businesses in the economy—those with employees and those
without—the ratio has still gone up: from 0.4 loans per business in
1995 to 0.82 loans per business in 2013.9 That’s a remarkable increase
in lending, given the increase in the number of businesses over the
time period.
If we look more carefully at the kinds of debt commonly used
by entrepreneurs, particularly in the early years of their businesses, it
is hard to make the case that they face declining access to capital. It
is cliché to say that entrepreneurs max out their credit cards to start
their businesses. But clichés often have a ring of truth. Many people
use credit cards to finance their young businesses in the very early
years of operation.
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If a lack of access to credit were keeping Americans from start-

ing businesses, we would expect to see credit card debt becoming
harder to get. Rising credit card debt levels should correlate posi-
tively with new employer firm formation rates. But that turns out
not to be the case. While the per capita rate of new employer firm
formation has fallen by nearly half since 1980, the real value of credit
card debt has increased nearly fivefold. In 1980, American consumers
had $168.5 billion in credit card debt (in 2014 dollars). In 2014, the
amount was $890 billion.10 It’s hard to imagine that Americans are
less likely to start new employer businesses because they lack access
to credit (from their credit cards) when there’s been a fivefold rise in
credit card debt.
Trade credit is another major source of capital for entrepreneurs,
used, according to the Federal Reserve’s Survey of Small Business
Finances, by nearly 60 percent of small businesses.11 If entrepreneurs
are suffering from a lack of access to capital, we would expect to
see a positive correlation between the level of trade credit and the
level of new employer firm formation. But in fact we see the op-
posite. In 1980, nonfinancial non-corporate businesses, the Federal
Reserve’s proxy for small companies, had $93 billion (in 2014 dollars)
in trade receivables—the amount billed to customers not yet paid by
them. In 2014, that amount had risen to $678.3 billion.12 A sevenfold
increase in the inflation-adjusted amount of trade credit, at a time
when the rate of new employer firm formation fell by 50 percent,
suggests that lack of access to trade credit is not behind the decline in
new employer firm formation.
Aggregate data are also inconsistent with the argument that new
companies cannot get financing. The Federal Reserve tracks much
information on small businesses. Data from its Flow of Funds report
show that small businesses are significantly more leveraged now than
they were in 1980.
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Figure 6.4. Ratio of Liabilities to Proprietors’ Equity

Although the years following the financial crisis have seen sig-
nificant deleveraging—a fall in the ratio of liabilities to proprietors’
equity—that shift appears to reflect a movement back toward the
long-term trend line. In 2005, this ratio was 49.7 percent, up from
30.7 percent in 1980. It increased to 92.4 percent in 2009 but fell
back to 62.5 percent in 2015 (figure 6.4). If America’s entrepreneurs
are more highly leveraged today than they were in the early 1980s, it’s
hard to make the argument that lack of access to financing is keeping
them from starting companies.
Changes in Savings and Entrepreneurship

Rates Aren’t Highly Correlated
The “personal savings rate” is the fraction of after-tax income
that people do not spend on personal consumption, interest, or trans-
fer payments. If this rate falls, it means that fewer Americans have
set aside the money it takes to start a business. It also means that
would-be entrepreneurs are less likely to have the financial track rec-
ord needed to convince lenders that they are good credit risks.
In recent years, the personal savings rate hasn’t really correlated
with the per capita number of new employer firms formed annually.
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Figure 6.5. New Employers per Thousand People and Personal Savings Rate
Source: Created from data from the Federal Reserve and the U.S. Census.
The per capita rate of formation of employer businesses—a number

that was discussed at length in chapter 1—as shown in the bars in
the graph and the personal savings rate, indicated by the line on the
graph, don’t seem to have moved in concert since the early 1990s
(figure 6.5). Especially in recent years, when the personal savings rate
has risen, we should have seen a rise in the rate of employer startups
if access to capital were actually a key driver of business creation.
Greater savings would have meant that would-be entrepreneurs had
more capital, which would have boosted their startup rate. That does
not appear to have happened.
The lack of correlation between personal savings and new em-
ployer firm formation might reflect the growth in personal borrow-
ing. Since the 1990s, Americans have been borrowing far more than
they once did and are using more borrowed funds to finance new
businesses. The amounts they save may be less important to firm
formation than they once were. Nevertheless, the data hardly sup-
port the argument that lack of access to capital is behind a decline of
entrepreneurship.
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Another blow to the capital access argument is the lack of cor-

relation between the rate of employer firm formation and household
net worth. If access to capital were a key driver of business formation,
we would expect to see household net worth positively correlated
with employer firm formation. But the trends have gone in the oppo-
site direction over the past twenty-five years. Between 1989 and 2013,
the net worth of the average American household rose 59 percent in
inflation-adjusted terms, and the employer firm formation rate fell
by nearly one-third. For the typical household, net worth rose by
0.9 percent per year between 1992 and 2013, while employer firm
formation was declining by nearly one-third.13 It is difficult to see a
positive correlation between these sets of numbers.
Not All Measures of Entrepreneurship Show Decline

In chapter 2 we saw that the failure rate of companies with em-
ployees has fallen significantly over the past thirty-plus years, leav-
ing the stock of employers roughly the same today, relative to the
population, as in the late 1970s. A constant stock of employers makes
it difficult to argue that anything—access to capital or anything
else—has led to a decline in entrepreneurship. Business ownership,
it seems, has shifted from new companies run by people in business
for themselves to not-so-new companies run by people in business
for themselves. If the people providing money to entrepreneurs
played a role in this shift, they would have had to prefer older small
businesses over newer ones. That’s possible, but no one is telling that
story.
The lack-of-capital story also falls down when we consider some of
the other data from chapter 2. The fraction of households holding
business equity was the same in 2010 as it was in 1989. The level of
entrepreneurship shown in the Kauffman Index of Entrepreneurial
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Activity was the same in 1996 and 2014. Lack of access to capital can’t
explain why levels of entrepreneurship have remained the same.
And lack of access to capital certainly can’t explain why entrepre-
neurship has gone up. That is what some measures show. We have
more businesses and more non-employers per capita now than in the
1980s and 1990s. More taxpayers are taking the self-employment tax
deduction and paying self-employment taxes, and a higher fraction
of American taxpayers have business income or loss on their indi-
vidual tax returns. How can an inability to get money account for
those increases?
Finally, the lack-of-capital argument certainly can’t explain what
has happened with high-potential startups. The United States is both
allocating more money for investment in high-potential companies
and creating more high-potential businesses today than when Apple
and Microsoft were startups. In short, the data patterns we would
expect to see if a lack of access to capital were constraining entrepre-
neurship just aren’t there.
1. Fewer banks are lending to small businesses than in the

1980s.
2. For twenty years before the financial crisis, when the rate
of new employer firm formation was in decline, surveys by
the NFIB did not show a trend toward lower borrowing by
small business owners.
3. The number of loans per business has risen substantially
over the past two decades even as the rate of employer firm
formation has declined.
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4. Trade credit and credit card debt have risen substantially

since the 1980s, even as employer firm formation has gone
down.
5. Small businesses are more highly leveraged today than they
were three decades ago, when rates of employer firm for-
mation were much higher.
6. Neither household net worth nor the savings rate corre-
lates positively with the per capita rate of employer firm
formation.
Many people have called for policy action to boost entrepreneur-

ship by providing entrepreneurs and would-be entrepreneurs with
easier access to financing. The theory is that entrepreneurship is de-
clining because would-be entrepreneurs lack access to capital, but
the data disagree on both counts. Even though banks have moved
away from lending to small businesses in recent decades, there is little
evidence for a lack of financing or that entrepreneurship, broadly
defined, is in decline.
The rate of creation of new employer businesses has fallen, but
the data do not point to a lack of access to capital as a contributing
factor. For twenty years before the financial crisis, while the rate of
new employer firm formation was falling, there was no trend toward
lower borrowing by small business owners. The number of loans
per business has risen substantially over the past two decades. Trade
credit and credit card debt have risen considerably since the 1980s.
Small businesses are more highly leveraged today than they were
three decades ago, when rates of employer firm formation were much
higher. And in recent years, neither household net worth nor the sav-
ings rate is positively correlated with the per capita rate of employer
firm formation.
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SEVEN
Don’t Blame the Regulators
Many entrepreneurship advocates think regulators are responsi-

ble for the decline of American entrepreneurship. Too much regula-
tion by the states and the federal government, they argue, is keeping
Americans from starting companies.1
Tim Kane, a research fellow at the right-leaning Hoover Insti-
tution, told the House Committee on Small Business in 2015 that
“government is discouraging entrepreneurship. It’s passive, maybe
even unintentional, but the institutional hostility to entrepreneurs is
very real.”2 David Burton of the Heritage Foundation told the same
committee that “high and growing regulatory costs” and “environ-
mental and energy regulations that raise the cost of energy and limit
development of energy resources” are responsible for the decline in
new business formation in the United States.3
Many small business owners agree. Consider the congressional
testimony of Drew Greenblatt, the president and owner of a com-
pany called Marlin Steel Wire Products. He explained that the stack
of forms he needs to fill out every year to adhere to federal and state
regulations is taller than he is.4 A 2016 survey of 12,000 skilled pro-
fessionals revealed that they believe regulation is the most important
factor affecting the ability to start a business. “When government
regulations complicate obtaining licenses and permits, hiring em-
ployees, and paying taxes, it is harder to start and grow a business,”
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D O N ’ T B L A M E T H E R E G U L AT O R S
wrote Lucas Puente, an economist at Thumbtack, which conducted

the survey.5
To revive entrepreneurship, Burton and others advocate nothing
less than a total regulatory reboot. Federal, state, and local govern-
ment agencies, they say, need to examine their regulations to deter-
mine the cost of compliance by entrepreneurs and revoke or amend
the ones that impose an undue burden on new and small businesses
or else create an exemption for young and small companies. The
latter should be subject to a less stringent regulatory framework un-
til they reach a certain size. All proposed laws and regulations that
might affect new and small businesses should include an economic
cost-benefit analysis that balances the gains from the law or regula-
tion against its costs.6 Elected officials should not pass environmen-
tal, health, and labor regulations without considering their impact
on young and small companies. All regulations should have sunset
provisions, and all elected bodies should create commissions to re-
view regulations and suggest changes and expirations to them.7
Although these recommendations sound reasonable, all policy
changes have consequences. Before we start altering or removing
regulation in the hope of stimulating entrepreneurship, we need to
know if regulation has actually hindered entrepreneurial activity and
if reducing regulation would boost it. In this chapter I will present
data that disagree with the claim that regulation is responsible for a
drop in entrepreneurship in America over the past thirty-six years.
But before I get to the data, let’s clarify exactly what advocates of the
“regulation hypothesis” are arguing.
The Regulation Hypothesis

In a nutshell, the regulation hypothesis is this: an increasing bur-
den of rules and regulations has made it more difficult and expensive
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to start a business in the United States than it was a generation ago.8

Because regulators have created a climate in which would-be entre-
preneurs must spend increasing amounts of time and money com-
plying with federal, state, and local laws and rules, fewer people are
starting companies.9
According to this argument, regulation creates two problems for
entrepreneurs: cost and complexity. To comply with regulations, en-
trepreneurs must divert time and money from productive uses. The
U.S. Small Business Administration estimates that annual compli-
ance costs just for federal regulations exceeded $1.75 trillion in 2008,
the most recent year for which data are available.10 A recent National
Small Business Association survey suggests that the time and expense
complying with state and local regulations is at least as high.11
Many states’ licensing requirements limit new business forma-
tion under the guise of protecting public safety,12 and this form of
state regulation has risen dramatically. “In 1950, 5% of workers re-
quired a license or certificate,” Marie-Josée Kravis of the Hudson In-
stitute writes in the Wall Street Journal. “Today that number is close
to 30%. Fortunetellers, party planners, florists, shampoo assistants,
cosmetologists, manicurists, beekeepers, librarians and many others
have joined the ranks of licensed workers.”13
The regulatory burden is costly for all businesses, but it is dis-
proportionately high for small and startup businesses, proponents
of the regulatory hypothesis argue. Regulatory adherence has both
learning curves and economies of scale. Making sure a workplace is
safe and filling out government paperwork are in large measure fixed
costs—the same whether you have one worker or 100. Because big-
ger companies can spread these fixed expenses over more revenue,
employees, or output, the cost per employee of following regulations
is much higher for a small business than a large one.14
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Academic, government, and trade association studies employ-

ing many methodologies have documented the higher compliance
burden that new and small companies face. A study by economists
Nicole and Mark Crain of Lafayette College showed that compliance
with federal regulations cost American businesses just under $10,000
per employee (in 2014 dollars). But firms with fewer than 50 workers
paid $11,724 per employee—17 percent more. For firms with at least
500 employees, the cost was only $9,083 per worker.15
The complexity of regulations also disadvantages new compa-
nies. As new regulations get added to old ones, the process of navi-
gating the system of rule-following becomes increasingly complex.
This regulatory maze deters would-be business owners who can’t fig-
ure out how to get a building permit or follow new environmental or
labor regulations.16 Established firms can rely on corporate counsel,
compliance officers, or other staff members to ensure that their busi-
nesses conform to regulation, but many new firms are flying blind.
The result is that fewer would-be entrepreneurs will take on the risk
of starting a company when they do not know how to manage a
complex world of regulations.
A Suggestive Correlation
This argument is powerful, but it is a theory. Where is the evi-
dence? And by that I mean data that come from aggregate statistics
or careful studies. Anecdotes are fine, as is vivid imagery like Drew
Greenblatt’s, but we can always find someone to claim that he or she
would have started a company if not for the regulatory obstacles. If
we are going to redo an entire regulatory regime, we need better sup-
port than a couple of examples. We have to know that rising regula-
tion really is driving down entrepreneurship in America.
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Those advocating regulatory reduction can actually point to

some compelling evidence. But to see it you have to understand how
economists measure certain things. As I mentioned above, the fed-
eral government has dramatically increased the regulatory burden on
businesses since the 1970s, and the courts have further expanded this
effect. The government has added a bunch of new rules and regula-
tions and has gotten rid of very few.17
This is where the creativity of economists has come into play.
Each federal regulation has to be outlined in a document called the
Federal Register—the repository where all federal regulations and
rules are published. By counting the number of pages in this reposi-
tory in each year, researchers can measure the regulatory burden over
time. More pages mean more rules and regulations and a heavier
burden.18
We can then compare the changes in the amount of regulation
to changes in entrepreneurial activity over the same set of years. As
Figure 7.1. Regulation as Correlated with New Employer Firm Formation

Source: Created from data from the U.S. Census and the Federal Register.
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those who claim that regulation is holding back entrepreneurship

might expect, the two trends are negatively related. The per capita
rate of employer business creation and the number of pages of rules
in the Federal Register correlate at −0.67. That is, as the regulatory
burden has risen over time, at least one measure of entrepreneurship
has declined (figure 7.1).
Is This Evidence Convincing?

The policy makers and pundits who have argued that a rising
regulatory tide is crippling entrepreneurship in America have not
spent much time evaluating whether their claims are correct. They
have preferred to focus, instead, on advocating “solutions.” A careful
look at the data suggests that there is not as much support for their
argument as appears at first glance.
Some Measures of Entrepreneurship Are Increasing over Time

The first problem with the overregulation argument appeared
in chapter 2: not all measures of entrepreneurship show a decline.
Some, in fact, are rising. If there is no decrease in entrepreneurship,
it creates a problem for the argument that regulation is causing a
decline. If we return to the statistics in chapter 2, we see the weak-
ness of the overregulation argument. Alongside the negative correla-
tion between regulation and new employer firm formation, there is a
positive correlation between regulation and the per capita number of
non-employer firms, the fraction of taxpayers filing self-employment
taxes, the number of business tax returns per capita, and many other
measures. These trends muddy the case that rising regulation is hin-
dering entrepreneurial activity.
Certain types of regulation might encourage a shift from em-
ployer businesses to non-employers. For instance, health and safety
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or labor regulations might lead entrepreneurs to avoid starting com-

panies with employees. But most regulations—such as environmen-
tal rules, privacy rules, and advertising restrictions—should affect
employers and non-employers similarly. Given that there is a positive
correlation between overall levels of regulation and the per capita
number of non-employer firms, and a negative correlation between
regulation and employer firm formation, we can’t argue that regula-
tion has a large influence on firm formation unless we know a great
deal more about how regulations affect the cost of labor.
Entrepreneurial Activity Is Becoming More Profitable

A second issue with the argument that regulation is to blame is
that entrepreneurial activity has grown increasingly profitable. The
case against regulation rests on the claim that it deters entrepreneur-
ial activity by raising the cost of running a business. If this were true,
then as regulation increases, profits should fall. But as we saw in
chapter 3, American businesses are far more profitable than they were
three decades ago. Profit margins are rising for sole proprietorships,
partnerships, and Subchapter S corporations, and average profits at
pass-through entities increased by nearly 200 percent in inflation-
adjusted terms between 1980 and 2012.
If regulation isn’t adding enough cost to business operations to
diminish profits, it is difficult to see how those costs are deterring
would-be entrepreneurs. Few people focus on costs alone when de-
ciding on whether to go into business for themselves. They focus on
the difference between costs and revenues—that is, on profits. Any
negative effect rising regulation has had on business’s bottom lines in
the past thirty years must have been offset by something else. If there
was an offsetting factor that allowed profits to rise, then would-be
entrepreneurs probably were not deterred from starting companies.
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Regulation Should Also Hurt Incumbent Firms

The third issue with the overregulation argument is that regula-
tions do not affect only new businesses: they should raise the cost
of running existing businesses as well. This means that if they are
making new businesses less likely to form, they should also make
existing businesses more likely to fail. That is not what we see in the
data. Over time, as the level of regulations has risen, the failure rate
of existing businesses has gone down.
One can always, of course, concoct an explanation for why reg-
ulation should be more problematic for new firms than for exist-
ing ones—for instance, that there are learning curves in regulatory
compliance—but these explanations don’t hold up. Most businesses
have not been in operation very long, nor have many mastered the
rules of regulatory compliance in any very sophisticated way. Thus,
the learning curve advantages in regulatory compliance are relatively
small, making it difficult to see how regulation disproportionately
hurts new businesses.
Other Patterns We Should Observe

Professors Nathan Goldschlag and Alexander Tabarrok of George
Mason University have long wondered if a rise in regulation has led
to a decline in entrepreneurial activity in this country. As econo-
mists in a school known for its belief in minimal government regula-
tion, they were likely predisposed to believe that increasing govern-
ment regulation has contributed to the decline in entrepreneurial
activity.
But they are also careful scholars who let the data show them the
truth, and they designed a clever test of whether small business is dis-
proportionately affected by the rise in regulation. They argued that
if there are economies of scale in regulatory compliance, then small
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business founders should respond to a rise in regulation by starting

bigger companies. This would let them take advantage of economies
of scale in regulatory compliance, a benefit that increases in value as
the amount of regulation goes up. Goldschlag and Tabarrok used
number of employees as a proxy for company size. Since new com-
panies have no more employees on average than they had thirty years
ago, the two economists concluded that there was little evidence that
business owners saw the rise in regulation as a sufficient motivation
to structure businesses in a way that would minimize regulation’s
impact. Absent evidence that business owners were trying to offset
the cost of a rising regulatory burden, Goldschlag and Tabarrok con-
cluded that that cost did not affect them much.19
The Timing Is Wrong

Yet another problem with the argument that regulation is deter-
ring startups is that the timing is wrong. During the time that new
employer firm formation declined significantly, small business owners
claimed that regulation has become less of a problem. The National
Federation of Independent Business, the oldest small business trade
association, has regularly surveyed its owner members since 1974.
These surveys always ask respondents to name the biggest problem
they face as business owners. Between 1995 and 2009 —a period of
declining new employer firm formation—the fraction of small busi-
ness owners saying government regulation was their biggest problem
declined by two-thirds.20
That pattern makes it difficult to believe that rising regulation is
actually a cause of the fall in employer firm formation. If overregula-
tion is the reason fewer people are starting employer businesses, there
should be more, not fewer, owners identifying it as a problem.
Another problem with timing is the misfit between the periods
when new employer firm formation rates decline and when regulation
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increased. Marie-Josée Kravis of the Hudson Institute attributes the

decline of business formation to the “regulatory fervor of the past de-
cade,” highlighting the Dodd-Frank legislation and Affordable Care
Act as regulatory excesses that have made entrepreneurship more
difficult.21
But it is hard to find a statistical link between the implementa-
tion of these laws and the decline in employer firm formation rates.
The laws were not enacted until 2010, well past the point when em-
ployer firm formation began to decline. By 2010 the rate of employer
firm formation had already declined by 53 percent from its 1978 peak.
From 2010 until 2013, the most recent year for which data are avail-
able, the rate has actually recovered somewhat, rising a modest 3 per-
cent. It’s not during the era of Dodd-Frank and the Affordable Care
Act that employer firm formation fell down dramatically but before
those laws were enacted.
The Correlation Is Probably Spurious

Nathan Goldschlag and Alexander Tabarrok, who have con-
ducted the most careful investigation of the effect of regulation on
new employer firm formation, do not believe the rise in regulation
has caused a decline in new employer firm formation. They think the
correlation between the number of pages in the Federal Register and
this measure of entrepreneurship is spurious. Rather than casually
compare the two numbers, they ran complicated regression analyses
to look at the correlation between these two measures over the 1999
to 2011 period for all six-digit industry codes, controlling for a vari-
ety of factors, including industry and year. They found “no obvious
relationship between regulation and startups.”22 Nor did they iden-
tify any relationship between the rate of entrepreneurship and the
change in regulatory stringency, different measures of specific or gen-
eral regulation, or regulation by the most active federal agencies.
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Goldschlag and Tabarrok tried a variety of statistical permuta-

tions and still found nothing: no relationship between levels of regu-
lation and rates of entrepreneurship. They even looked at specific
industries to see if there was an effect for just a few sectors in the
economy. Again, nothing. As the two economists described it, “De-
spite experiencing dramatic increases in regulation, the increasingly
regulated industries did not see increasingly lower startup rates.”23
Basically, the relationship present in a simple correlation doesn’t hold
up to more rigorous techniques. That means there are no data to sug-
gest that increased regulation has caused a decline in new employer
firm formation.
The two scholars looked at other ways in which regulation could
adversely affect new employer firms. If they found evidence of some
other way that regulation held back the growth or survival of new
employers, then we would have some suggestion that regulation neg-
atively affected entrepreneurship, even if it didn’t cut back on the
number of people starting new businesses with paid workers.
One possibility is that regulation could be keeping small firms
from becoming big businesses. A heavy regulatory burden could be
so distracting to the founder of a small company or so costly to man-
age that the business cannot grow. If this were true, then we would
expect to see a correlation between the level of regulation and the
change in the employment of startups. But that trend is not there.
The Fed’s Ryan Decker and his colleagues (described in earlier chap-
ters) report that they have seen no evidence of regulations adversely
affecting the growth of businesses.24
Goldschlag and Tabarrok argue that if regulation were really hin-
dering new employer firm formation, we should also see different
patterns of startup activity across different states, countries, and
industries. Countries impose different levels of regulation on their
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businesses—Sweden, for instance, regulates its companies more

heavily than Chile does—and different states have different levels of
rules as well. That is one way some states claim to be more “business-
friendly” than others. Finally, some industries are regulated much
more heavily than others. Manufacturers, for instance, face more
rules than lawn care services.
This difference in regulation across states, countries, and indus-
tries allows observers to identify the effect of government rules on
levels of entrepreneurship. The primary finding is that there isn’t
one. Researchers have found that over the past three-plus decades,
the rate of employer firm formation has declined by similar amounts
across states and countries with high and low levels of regulation. If
business regulations were really affecting startup activity, then we
should see differences in the rate of decline that correlate with dif-
ferences in regulation. Decker and his coauthors have found that the
decline in employer business formation is roughly the same in states
with business philosophies as different as Texas and California. It
is too constant throughout the country for regulation to be playing
much of a role.25
Goldschlag and Tabarrok look across industries, rather than across
states, and find similar patterns to what Decker and his colleagues
observed. Although the level of regulation has varied a lot across in-
dustries in the past thirty-plus years, Goldschlag and Tabarrok have
found that the degree to which new employer firm formation has
fallen has been relatively constant.26 Similar declines in rates of entre-
preneurship across highly regulated and lightly governed industries
belie the argument that rising regulation is responsible for decreasing
rates of employer firm formation.
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Not All Regulation Reduces Entrepreneurial Activity

A final challenge to the overregulation argument is that regula-
tion does not always depress entrepreneurship. Some types of regula-
tion are business-friendly. The best example of that lies in the rules
about health insurance.
Economists and policy makers disagree about the value of the
Affordable Care Act and the changes it brought in how Americans
get health insurance. Some observers have come out in favor of the
law and others have voiced strong objections. Those who are careful
analysts, however, have acknowledged that, at least in theory, the
new law could be entrepreneurship-friendly.
The argument goes something like this. When people have
health insurance that is provided by their employer, starting your
own company often means giving up that insurance. A lot of people,
particularly those with non-working spouses or spouses who work
in companies that do not provide employee health insurance, are
reluctant to give up their jobs for fear of losing health care cover-
age. This concept, called “job lock” by analysts, tells us that without
the Affordable Care Act, some would-be entrepreneurs are deterred
from starting businesses. New regulations like the Affordable Care
Act should therefore make Americans more likely go into business
among themselves.
The implementation of the Affordable Care Act is far too recent
for us to have strong evidence one way or another about its impact
on new business creation, but we have some data from state-level ef-
forts to change health insurance laws. In the mid-1990s, some states
changed their non-group health insurance markets to impose ad-
ditional regulations that made it harder for insurance companies to
charge different premiums to different people based on the person’s
health, or to keep people from getting insurance because of preexisting
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conditions. On balance, these regulations made it easier for people

starting companies to get health insurance. Did they increase startup
rates in the states that implemented them?
Careful research by economists Bradley Heim of Indiana Univer-
sity and Ithai Lurie of the U.S. Treasury shows that they did. While
we might quibble about how these authors measured entrepreneurial
activity, they found a pattern consistent with the argument that more
regulation led to more entrepreneurship. Places that implemented
heavier state regulation showed a 16 percent rise in the probability
that a resident would have some self-employment income.27
1. Because regulation raises the cost and complexity of start-

ing a business, it should reduce the rate at which people
start new employers.
2. Between 1977 and 2013, the per capita rate of creation of
new employer businesses showed a −0.67 correlation with
the number of rules pages in the Federal Register.
3. Over the same time period, the level of regulation correlates
positively with the per capita number of non-employer busi-
nesses and IRS measures of the rate of entrepreneurship.
4. Owning a business is becoming more profitable over time,
a pattern not expected if increasing regulation has a nega-
tive effect on entrepreneurship.
5. Major increases in regulation should be followed by de-
clines in employer firm formation, and small business own-
ers should report that regulation is becoming more onerous
when rates of employer-firm formation decline, but we do
not see these patterns in the data.
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6. The negative correlation between new employer business

formation and the number of rules pages in the Federal
Register, if it is real, should be present after sophisticated
methods are used to test it, but it is not.
7. More regulation sometimes increases new business for-
mation.
Despite the rhetoric that it is killing entrepreneurship in Amer-

ica, there is little evidence that regulation has caused a decline in
employer firm formation. Regulation increases the cost and com-
plexity of business formation, yet entrepreneurship has become more
profitable over time. The negative correlation between the number of
federal regulations and the rate of new employer firm formation does
not hold up under complex methods of statistical analysis. Periods
of major regulatory increases have not been followed by declines in
employer firm formation, nor do small business owners report that
regulation is becoming onerous at times when new employer firm
formation have declined. The rise in regulation correlates positively
with an increase in some measures of entrepreneurship. Finally, evi-
dence suggests that some new regulations—particularly rules that
make it easier for people to obtain health insurance—are associated
with growth in new business creation.
In short, like lack of access to capital, a rise in regulation does not
appear to be the “explanation” for the changes in American entrepre-
neurship in recent decades.
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EIGHT
High Taxes Are Not the Cause
Some observers on the right think they know what is hinder-

ing entrepreneurship in America: high taxes. Right-leaning pundits
are convinced that “ever higher” taxes on new and small businesses
have made it impossible for entrepreneurs to make the money they
once did. The reduced expectations of earnings, they say, has reduced
the incentive of would-be entrepreneurs to pursue their dreams by
striking out on their own. People who are considering starting a
company, the story goes, see the high tax burden they will face and
decide not to do it.
This is the view of Tim Kane, who writes, “At the federal level,
high taxes and higher uncertainty about taxes are undoubtedly in-
hibiting entrepreneurship.”1 American entrepreneurship is in decline
because greedy and foolish policy makers have ignored a simple ax-
iom of basic microeconomics: the more you tax something, the less
of it you will have.
The good news, these observers point out, is that the problem is
easily solved: just cut taxes on entrepreneurs and would-be entrepre-
neurs. Once policy makers lower marginal income tax rates, create
tax exemptions for entrepreneurs, and offer tax credits to business
founders, entrepreneurial activity will take off.
Advocates of this position have even been so helpful as to tell
Congress exactly how to accomplish that goal. John Dearie of the
Financial Services Forum told Congress, “The Internal Revenue
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H I G H TA X E S A R E N O T T H E C A U S E
Service should be directed to establish a new entrepreneur— or

‘e-corp’—tax status, whereby newly launched businesses would be
subject to a five percent flat income tax for the critical first five years
after formation. Such favorable and predictable tax treatment will
help cultivate new business formation, survival, and growth by al-
lowing new businesses to retain and reinvest most of what they earn,
preserving critical cash flow, and eliminating the distraction and bur-
den of tax complexity and uncertainty.”2
Sounds simple, straightforward, and clear. The one tiny problem
is that it won’t work.
Despite widespread belief in Mr. Kane’s and Mr. Dearie’s argu-
ments, there is no evidence that federal tax policy has contributed to
the decline in employer business formation over the past three decades
or that exempting new businesses from taxation will do anything to
alter that decline. Without a causal link between federal income tax
policy and rates of entrepreneurship, these tax plans offer little ben-
efit for entrepreneurship and could do a lot of potential harm.
Taxes Don’t Reduce People’s

Willingness to Start Businesses
Many policy makers and pundits have a strange view of how peo-
ple decide to start a business. Would-be entrepreneurs, they think,
calculate the effect of taxes when considering starting a company and
refrain from going ahead if they figure their taxes will be too high.
I’ve never met an entrepreneur who undertakes that calculation,
and it’s not just me. Surveys of prospective entrepreneurs reveal that
virtually none of them factor taxes into their decision making. Much
more common is the desire for independence or autonomy, the need
for a flexible schedule, the goal of introducing a new product or ser-
vice to the world, or the wish to make money. It is hard to imagine
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such people deciding, at the margin, not to start businesses because

their taxes would be too high.
The policy makers, reporters, and academics who claim that taxes
affect people’s willingness to start companies falsely infer their influ-
ence on the startup decision from the general negative view of taxes.
Most people don’t like them and would prefer not to pay them. But
that doesn’t mean they won’t start companies because they dislike
having to pay taxes on their profits, any more than people refuse to
get married because they don’t want to be nagged by their spouses.
Nobody likes being nagged, but spousal nagging is almost never a
deterrent to marriage.
The anti-tax pundits also falsely draw inference from observations
that taxes have negative effects on economic activity. They claim that
tax rates must be bad for entrepreneurship because they are bad for
business in general. Anthony Kim of the Heritage Foundation, for
example, writes, “High tax rates and a tax code that is burdensome
for both individuals and businesses clog America’s economic arteries,
hindering vibrant economic growth.”3
But just because higher taxes reduce people’s incentive to work
hard, this doesn’t mean they will reduce people’s motivation to start
businesses. People might shift from working for others to starting
businesses when taxes rise. Moreover, after-tax pay might be more of
an incentive for wage work than it is for running a business. Taxes
might influence my decisions about how hard to work for someone
else, but not about whether to start my own business.
Taxes Both Encourage and Discourage Startups

When taxes are high, entrepreneurship may be more desirable,
not less, because it offers tax-avoidance opportunities that wage em-
ployment does not. When you are in business for yourself, the IRS
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knows a lot less about your income than it does when you are on a
salary. Virtually everyone’s wage employment gets reported to the tax
authorities on W-2 forms, but companies’ revenues and costs are not
similarly reported. If you want to cheat on your taxes, you are better
off running your own business.
When you are running your own company, you can charge many
personal expenses, like the cost of your car or part of your home, to
your business. It is hard for the IRS to catch people cheating a little
bit at the margin.
And that is just what happens. The IRS reports that roughly one-
third of the tax gap—the difference between what the IRS was owed
and what it was paid—is business income that earners neglect to
report on their individual tax returns. No other source of the tax gap
is as large. According to Susan Nelson, writing in the National Tax
Journal, 60 percent of sole proprietors underreport their income.4
When the government raises tax rates, it also increases the value
of being able to cheat a little. People may be inclined to shift into en-
trepreneurship to keep their tax payments down when rates go up.
For many businesses, this is easier than you think. A house
painter could be self-employed or work for someone else. The same
is true for a hairdresser or a lawn care guy. If that shifting tends to
happen when tax rates rise, then we should see more, not fewer, new
businesses as a result.
People’s willingness to cheat on their taxes rises as rates go up.
Few people think it is worth the risk of cheating if they will get only
a few dollars. No one wants to risk going to prison to save the price
of a venti latte at Starbucks. But they might do it for enough money
to buy a new car. Legal ways to avoid taxes become more attractive
as well. As marginal tax rates rise, people become more likely to start
businesses because they want to avoid taxes.
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But the higher the tax rate, the less income people can take from
running a business, and the less incentive they presumably have
to start one. This, of course, is the argument that Tim Kane, John
Dearie, and Andrew Kim are making. It is a flawed argument: the
incentive does not lie solely in the income from the new business but
in the difference between what a prospective entrepreneur has been
making and what she could make once she is in business for herself.
If taxes rise on both profits and wages, that increase might not affect
the incentive in either direction.
In essence, that is what researchers have found. Some studies
show a small negative relationship5 between higher tax rates and the
tendency to start a business, whereas others show a small positive ef-
fect.6 Taken all together, the most plausible conclusion one can draw
from the studies is that tax rates have little effect.
Unfortunately, people seeking to make a political point have
oversold the findings in both directions. Studies by Donald Bruce
and Tami Gurley7 and by Bruce and John Deskins8 have found that
an increase in the marginal self-employed income tax slightly reduces
the odds of entry into entrepreneurship. Many people have jumped
on these findings to say that increases in tax rates caused the past
three decades’ decline in employer firm formation.
There are several problems with such conclusions. First, the sta-
tistical approach that Bruce and his coauthors used does not allow
them to assume causality, and they are pretty careful not to do so.
They know that tax rate changes are often responses to changes in
economic conditions, creating a problem that economists call “en-
dogeneity bias.” This means that the relationship between the tax
rate and the tendency of people to start businesses may not reflect
the impact of the tax rate but some other factor, such as general
economic conditions, that influences both taxes and entrepreneurial
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activity. Briefly, when the economy is doing well, taxes often go up,
but fewer people go to work for themselves because they can get
other jobs. The result is a negative correlation between the tax rate
and self-employment, but it is spurious to say that the tax change
caused the change in self-employment. Both the tax rate and the rate
of self-employment correlate with the condition of the economy.
Many observers, particularly those interested in influencing pol-
icy makers, are not as careful with information as the researchers
themselves. They often gloss over nuances like causality and simply
say that research has proven that higher tax rates depress entrepre-
neurial activity.
Second, a lot of other studies show the opposite from what Bruce
found: they show a positive effect of tax rates on firm formation
or no effect at all.9 For example, James Long found that a 10 per-
cent increase in income taxes boosted entry into self-employment by
7.4 percent.10 Julie Berry Cullen and Roger Gordon found that re-
ducing the marginal personal income tax rate by just 5 percent would
reduce the amount of entrepreneurial activity in the United States by
nearly one-third.11 Bruce and his colleagues too have found evidence
that increasing the marginal personal income tax rate will increase
the number of people running their own proprietorships.12
Again, although the researchers are pretty careful, the advocates
are not. They often focus on the studies that support their policy
preference and ignore those that don’t. But the evidence insists that
the results are conflicting.
Third, even when researchers find that increasing taxes depresses
the tendency to start businesses, the size of the effect is too small for
the explanation to hold water. Most of these studies have found such
small effects that most researchers would call them trivial. Policy
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makers would need to virtually eliminate taxes to get just a small

improvement in firm formation.
Fourth, there is a mismatch between the data and many observ-
ers’ arguments. As we saw in chapter 1, the rates of employer firm
formation have fallen in recent years. But most studies of the effect
of taxes on entrepreneurial activity do not look at rates of employer
firm formation. They look at Schedule C tax filings or non-employer
business formation.
You can probably anticipate the problem. Those forms of entre-
preneurship—non-employer businesses—have recently been on the
rise. How can tax rates be responsible for the decline in entrepre-
neurial activity when the measures of entrepreneurial activity the re-
searchers are looking at have gone up? That makes no sense at all.
Some researchers find negative effects for some people and posi-
tive effects for others. For example, Mina Bilamoune-Lutz and Pierre
Garello, looking at the effect of tax rates on the rate at which people
start businesses in fifteen European countries, found that higher
rates of taxation discourage new firm formation among those earn-
ing a lot of money but encourage it among those earning a little.13 If
taxes truly are a disincentive that keeps would-be entrepreneurs from
starting companies, they should discourage entrepreneurship among
people at all income levels, not just those earning a lot of money.
Then There Are Three Other Problems

Those who are trying to blame the decline in employer firm for-
mation on increased taxes may be bothered that the data will not
cooperate. But the story gets worse. The statistics offer three other
obstacles to their argument. First, tax rates and the rate of employer
firm formation have both trended downward over time. That’s not
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the right pattern if you think tax rates have a negative effect on em-
ployer firm formation. If anything, it suggests the opposite—that
higher taxes encourage entrepreneurs to start new businesses. As the
tax rates have gone down, rates of new employer firm formation have
declined along with them.
Second, different measures of entrepreneurship move in opposite
directions. That makes it difficult to argue that higher marginal in-
come tax rates are having any particular effect. Whichever direction
the taxes rates move, some measure of entrepreneurship— employer
firm formation, the per capita number of non-employer businesses,
the per capita number of businesses measured by IRS statistics, or
something else—is likely to go in the “wrong” direction.
Third, the geographic variation in the rate of new employer firm
formation is not consistent with state variation in tax rates. If higher
taxes lower the rate of employer firm formation, then we should
expect to see higher-tax states experiencing greater declines in em-
ployer firm formation than lower-tax states. But as Federal Reserve
economist Ryan Decker and his colleagues have found, that’s not the
case. States with higher tax rates and those with tax rates that have
increased more have not experienced greater declines in employer
firm formation rates than other states. In recent decades, employer
firm formation rates have fallen faster in the South and West, which
tend to have lower tax rates than in the Midwest and Northeast.
Moreover, California and Texas, two states with very different ap-
proaches to tax policy, show large and similar declines in entrepre-
neurial activity.14 If a high-tax state and a low-tax state have similar
patterns of decline, something other than taxes is probably behind
the trend.
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1. People rarely focus on tax rates when deciding whether to

start a new business.
2. High tax rates both encourage and discourage business for-
mation, yielding no net effect.
3. The marginal income tax rate and the rate of employer firm
formation have both trended downward over the past three
decades.
4. Tax rates cannot correlate with all measures of entrepre-
neurship simultaneously because these measures move in
different directions.
5. High-tax U.S. states have not seen greater declines in em-
ployer firm formation than low-tax states.
There is little evidence that the decline in employer firm forma-

tion rates over the past three and a half decades is due to increased
marginal income tax rates. Tax rates are almost never the deciding
factor in a would-be entrepreneur’s decision to start a business, and
they are not often even a consideration. Low tax rates both encour-
age and discourage business formation, yielding no net effect of tax
rates on entrepreneurial activity. There is no correlation between
rising tax rates and declining rates of employer firm formation in
the United States over the past thirty-plus years. In fact, the mar-
ginal income tax rate and the rate of employer firm formation have
both trended downward. High-tax U.S. states have not seen greater
declines in new employer firm formation than low-tax states in re-
cent decades. Employer firm formation correlates negatively with
many other measures of entrepreneurship, such as the fraction of
Americans indicating business income on their federal income taxes
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or taking the self-employment tax deduction, a pattern that makes it

hard to assign any positive or negative effect from tax rates.
The often-heard argument that higher tax rates depress entre-
preneurship appears to be independent of the data. Many on the
right simply believe this claim is true, whatever the evidence says.
Economist Ian Hathaway, who was one of the first to document the
decline in the rate of new employer firm formation, summarized the
situation aptly in an online interview: “I don’t think taxes are actually
a factor in this.”15
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NINE
It’s Not a Lack of Immigration
Another explanation for the decline in employer firm formation

is a lack of immigration. Several people associated with the Ewing
Marion Kauffman Foundation, a research and advocacy organization
in Kansas City, have argued that the solution to the post-1970s de-
cline in employer business startups is to increase immigration.
Before we start printing visas, however, we should probably try
to confirm that lack of immigration is actually causing— or at least
contributing to—the decline. A closer look does not provide much
support for this idea. There is no evidence that too little immigration
is responsible for the decline in employer firm formation and the rise
in non-employer business generation. There is scant support for the
idea that immigrants are more entrepreneurial than the native born
or that making it easier for them to get into this country will boost
entrepreneurship rates.
There might be many good reasons for stapling green cards to
STEM degrees or otherwise boosting immigration. I do not take a
position on that issue in this book. But there is no reason to believe
that trends in entrepreneurship rates in America over the past several
decades have been driven by levels of immigration or that more im-
migration will generate more entrepreneurship.
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I T ’ S N O T A L A C K O F I M M I G R AT I O N
The Basic Argument

Before I get into the reasons why the immigration argument is
flawed, I should outline what it is. This school of thought points to
three reasons why we need more immigration if we want to reverse
the downward trend in employer business creation. First, immi-
grants are more likely than the native born to start businesses. Dane
Stangler, the vice president of research at the Kauffman Foundation,
says that immigrants have rates of entrepreneurship that are up to
twice as high as the general population’s because they are less risk
averse.1 Robert Litan and his coauthor Ian Hathaway, both at the
Brookings Institution, say, “We know that immigrants have a great
propensity to launch new businesses—high-tech businesses in par-
ticular. . . . So we know [immigration is] something that will push
the entrepreneurship rate up higher.”2
Second, by making it difficult for immigrants to enter and stay
in the United States, the government has reduced the pool of people
who will start businesses. This country’s antipathy toward immigra-
tion, goes the argument, has caused would-be immigrant entrepre-
neurs to choose other countries instead. A good example is Chile.
Since 2010, Chile has given foreign entrepreneurs a $40,000 stipend,
free office space, and other support if they agree to visit the coun-
try for half a year and network with locals.3 The lack of programs
like Start-Up Chile puts us at a competitive disadvantage in attract-
ing immigrant entrepreneurs and lowers our level of entrepreneurial
activity.4
Third, more immigration is necessary to increase business start-
ups because America cannot produce enough talent to meet employ-
ers’ needs. Startups can’t find the local talent that they need or af-
ford to provide training to employees who lack the necessary skills,
explains John R. Dearie of the Financial Services Forum. Moreover,
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“the scarcity of skilled talent has driven up the price with regard
to salaries and benefits, [and] many cash-challenged startups simply
can’t compete.”5
The Proposed Solutions

To those observers who believe these arguments, the solution
to the problem of declining employer firm formation is easy. Policy
makers need to adopt policies that boost immigration.
Specific recommendations are not hard to find. The Kauffman
Foundation’s Jonathan Ortmans suggests “the creation of a visa for
immigrant entrepreneurs that allows foreign job-creators to start and
operate businesses in America.”6 Robert Litan suggests “stapling a
green card to a STEM degree,” updating the H-1B visa system, and
making it “easier for immigrant entrepreneurs to secure long-term
visas and permanent-resident status.”7
These suggestions are just the tip of the iceberg. This school of
thought has many more, all with a common theme: boost immigra-
tion, and entrepreneurship in America will recover.
Should We Do It?
Are those who argue this point of view right? I don’t think so.
As we have seen, there is little evidence that entrepreneurship overall
is in decline. There is also little evidence that a lack of immigration
has caused the decline in employer firm formation or that efforts to
boost immigration will bring back the rates of employer firm forma-
tion seen in the late 1970s.
The people who advocate encouraging immigration to boost en-
trepreneurship have not paid much attention on the data. Here are a
few of the ways the data disagree with their assertions.
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Several Measures of Entrepreneurship Are Actually Rising

The first problem with the insufficient immigration argument is
the one that plagues many of the arguments debunked in this book.
Not all measures of entrepreneurship have been trending downward
over the past several decades. As we saw, many indicators, includ-
ing the per capita number of non-employer businesses, the fraction
of taxpayers filing self-employment taxes, the number of business
tax returns per capita and many others, have been going up. What’s
gone down is a very specific measure, the rate of employer firm
formation.
The fact that the different measures of entrepreneurship have
moved in opposite directions makes it difficult to pin what has hap-
pened on insufficient immigration. For a lack of immigration to have
had these various effects on entrepreneurship over the past thirty
years, immigrants would have to have very different attitudes toward
the creation of employer and non-employer businesses than the na-
tive born. It is tough to see what those attitudes could be. No data
suggest that immigrants are more willing than the native born to
start non-employer businesses and less willing to start employers (or
vice versa). Thus, there is no good explanation for why the increase
in immigration in recent decades would have boosted non-employers
and shrunk employers. Nor are there any data to suggest that an
increase in immigrants now would boost the rate of employer firm
formation.
There Is No Positive Correlation between the Employer Firm

Formation Rate and Immigration
Even if we restrict our examination to the rate of employer firm
formation, it is hard to find evidence that more immigration will
help. For that argument to have any validity at all, we would need to
see a positive correlation between the new employer firm formation
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rate and the rate of immigration. But that is not the case. If anything,
the data suggest the opposite.
Scholars have documented the extensive immigration to this
country that happened between 1970 and 2010. As Audrey Singer
explained in 2013, “Immigration began to pick up again in earnest,
increasing steadily over the four decades between 1970 and 2010. The
greatest increase came in the 1990s, when more than 11.3 million im-
migrants arrived, a growth of 57 percent. Immigration in the 2000s
slowed a bit after the recession; still, nearly 9 million immigrants
arrived, boosting the U.S. foreign-born population to nearly 13 per-
cent, the highest share since 1920.”8
While immigration into the United States was rising during this
period, the rate of new employer firm formation was falling. That
means more immigration is associated with less employer business
creation over time, not the other way around. As we saw earlier, in
1980 the number of new employer businesses per thousand Ameri-
cans was 1.98. By 2010 it had fallen to 1.26. Meanwhile, the share
of the population that was not born in the United States has been
trending upward. In 1980, 6.2 percent of the U.S. population was
foreign born. By 2010 that share had more than doubled, to 12.9 per-
cent (figure 9.1).
Immigrants Are Not More Likely to Start Businesses

Than the Native Born
Much of the argument for looser immigration policies is that
those policies will boost the stock of people in this country who want
to start businesses, because immigrants are supposedly more likely to
start businesses than native-born Americans. Some observers claim
that immigrants are twice as likely to start companies.9
If you find that claim outrageous, you are not crazy. It is not
supported by carefully collected government statistics on the relative
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Figure 9.1. Immigration and Employer Firm Formation

Source: Created from data from the U.S. Census and the
U.S. Immigration and Naturalization Service.
entrepreneurial activity of the native and foreign born. Steven Cama-

rota of the Center for Immigration Studies, a non-partisan Washing-
ton think tank, looked at the Census Bureau data on the question.
In a 2012 report, he wrote, “Immigrants and natives have very simi-
lar rates of entrepreneurship—11.7 percent of natives and 11.5 per-
cent of immigrants are self-employed.”10 Contrary to what some
observers are claiming, the native born have slightly higher rates of
entrepreneurship.
Some studies do show evidence of a higher rate of entrepre-
neurship among immigrants, but the differences are very slight. For
instance, research conducted by Professor Rob Fairlie of the Univer-
sity of California at Santa Cruz on the data from the U.S. Census’s
Current Population Survey shows that “10.5 percent of the immigrant
work force owns a business, compared with 9.3 percent of the non-
immigrant work force.”11 Fairlie’s careful analysis of government data
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shows a difference that is far from the factor of two claimed by the
Kauffman Foundation’s Ortmans.
Fairlie’s report, which was prepared for the Small Business Ad-
ministration, makes another important observation as well. The
higher rate of entrepreneurship among immigrants in one study
might be perfectly compatible with research that shows no difference
between immigrants and native-born people. There are two reasons
for this. First, some studies use self-employment to measure entre-
preneurship, and others use business ownership. Since some self-
employed people are not business owners, the two measures needn’t
show the same patterns for immigrants and non-immigrants.
Second, some studies look at the number of entrepreneurs or
rate of entrepreneurship at a particular moment, whereas others look
at the transition into entrepreneurship over time. Comparing stocks
and flows is tricky (see chapter 2). Immigrants might have a higher
rate of entry into entrepreneurship but the same rate of business
ownership because they also exit from entrepreneurship at a higher
rate. In fact, this is exactly what the SBA study finds. Fairlie explains
that “immigrants move into and out of business ownership at a much
higher rate than non-immigrants.”12
This difference has an important policy implication. If immi-
grants do not stay in business for as long as the native born do, then
the benefit of their slightly higher rate of entry into entrepreneurship
is lost. Efforts to attract a group of people who churn into and out of
entrepreneurship will do little to change the stock of entrepreneurs
in the economy.
What about the idea that immigrants are more likely to start
non-employer businesses and less likely to start employer businesses?
In his exhaustive study of immigration into the United States, Steven
Camarota looked at businesses led by the self-employed. He found
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that “self-employed natives are somewhat more likely to have larger

businesses than self-employed immigrants”13 and that “the average
self-employment income (revenue minus expenses) of immigrants is
slightly higher than that of natives.”14
Both of these observations are consistent with recent decades’
trends in entrepreneurship. We have seen earnings from entrepre-
neurship and the rate of creation of non-employers rise, and the
rate of creation of employers decline. How do we fit immigration
into this picture? Perhaps as immigration has risen, there has been a
shift in the pool of company founders toward those born outside the
country. Because immigrants are more likely to start non-employers
and less likely to start employer businesses than the native born,
the growth in immigrants might have contributed to the trends we
have seen.
Yet it is unlikely that immigration has had much effect on these
trends. Immigrants comprise a relatively small portion of the popu-
lation, and they have only a slightly higher tendency to start non-
employers than the native born. It is very unlikely that the rise in
immigration could account for much more than a tiny portion of the
rise in non-employers and the decline in employer businesses.
Even if we allow that immigration contributed some small
amount to these trends, it doesn’t follow that boosting immigration
is a “solution” to the problem of declining employer business forma-
tion. If you believe that this decline and the rise in non-employer
businesses are bad for the economy, you should advocate policies
with some chance of reversing the trends. Since immigrants are more
likely to start non-employers and less likely to start employers than
the native born, policies to boost immigration will move us in the
wrong direction. They will exacerbate the negative movement we
have seen over the past several decades.
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Other Countries Are Not Getting the Immigrants

Those advocating immigration as a solution to the problem of
employer business formation face another data challenge. Other
countries’ programs to encourage immigrant entrepreneurship are
far too small to affect levels of entrepreneurship in the United States.
Even if these programs did draw immigrant entrepreneurs, the effect
is too slight to influence U.S. entrepreneurship statistics.
Consider the numbers for Start-Up Chile, the example often
mentioned in white papers and congressional testimony. In its first
four years of operation, the program admitted 810 entrepreneurs
from all countries; of these, only 132 chose to stay in Chile. We have
no way of knowing how many of those companies would have been
founded in the United States had we had a comparable program.
But even if we assume that a similar program conducted here would
have captured all of these companies, it is a miniscule addition to
the number of new employer businesses being founded every year.
Bringing in an additional 33 new employers in 2013, for instance,
would have increased that year’s number of new U.S. companies with
paid workers by eight one-thousandths of 1 percent.15
The Proposed Programs Are Costly

Government programs aren’t free. Yet those advocating new gov-
ernment policies always seem to ignore these programs’ costs. Advo-
cates of the startup visa program recommend that we create a special
visa for foreign-born entrepreneurs who would like to start compa-
nies in the United States. Under the plan, the country would admit
entrepreneurs for two years provided they meet national security re-
quirements and raise a minimum amount of initial funding. If a new
business then produced a minimum level of verified revenue and jobs
for people outside the entrepreneur’s family, the government would
extend the visa for several more years.
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Like any other government program, this one would require

a bureaucracy to administer it. Government bureaucracies cost
money. We would need to ensure that the companies seeking entry
had real revenues; otherwise dishonest people could simply create
sham companies as a way to immigrate. We would have to verify
that those applying for the program are not security threats. Even
if increased immigration were to bring a boost in entrepreneurship,
it would not be worth a rise in violence from immigrants. It would
not be cheap to ensure that the prospective entrepreneurs were not
a security risk.
Easier Immigration Won’t Solve the Skilled Talent Shortage

The argument that more liberal immigration policies would
encourage the formation of employer businesses by making more
trained workers available for startups is also flawed. To start with, it
is inconsistent with the data. Immigration has been rising for more
than three decades. If a lack of talent prevents American entrepre-
neurs from starting employer businesses and immigration mitigates
that constraint, then the rate of formation of new employers should
have risen, not fallen, over that period. Rising immigration should
have made it easier for businesses to find the workers they need,
and would-be entrepreneurs, seeing the talent constraint loosening,
should have become more likely to start their businesses.
But the rise in immigration has coincided with a decline in em-
ployer firm formation. Clearly, the story about immigration solving
the talent shortage and encouraging employer firm formation can’t
be right.
The argument that immigration will ease employers’ access to
trained labor suffers from another problem as well. The skilled talent
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shortage affects all businesses, not just startups. It is difficult to see

how more immigration would provide a relative benefit to new com-
panies. More immigration or less immigration, startups still compete
with existing businesses for access to workers. Better skilled workers
would reduce businesses’ need to train those workers, but it would
not change the relative advantages that large, existing businesses have
in attracting talent. While smaller and new businesses often offer
workers advantages over big businesses—flexibility, autonomy, and
a chance to take on more responsibility at a younger age—the aver-
age American worker prefers to work at older and larger companies
because those businesses pay higher wages and offer more benefits.16
Even if changes to immigration policies brought more trained work-
ers to this country, potential startups would become no more likely
to attract those workers away from older and larger businesses than
they are now. The boost in immigration would do little to slow the
decline in employer firm formation.
1. The rate of immigration has increased dramatically over

the past three-plus decades, a pattern inconsistent with the
argument that more immigration would boost the rate of
employer business formation.
2. Rising immigration has coincided with a decline in new
employer firm formation over the past thirty years.
3. Explanations for why immigration is good for entrepre-
neurship are difficult to reconcile with the increase in non-
employer businesses in recent decades.
4. Immigrants are no more likely than the native born to start
businesses.
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5. The cost of policies to encourage more immigrant entre-

preneurs would be high and could very well exceed the
benefit in employer business formation.
There is little evidence that a shortage of immigration has caused

the decline in employer firm formation. Federal government policies
have not reduced immigration in recent decades, and immigrants are
no more likely to start businesses than native-born citizens. The no-
tion that restrictive immigration policies have kept would-be entre-
preneurs from starting businesses by reducing the supply of talented
employees does not stand up to scrutiny.
Immigration rates correlate negatively with the rate of employer
firm formation and positively with the rate of creation of non-em-
ployers. That pattern suggests that encouraging more immigration
would not stem the decline in employer firm formation but would
exacerbate it—and also exacerbate the past two decades’ shift toward
non-employers.
In short, the evidence simply fails to support the notion that
lack of immigration is the “cause” of the decline in employer firm
formation and that policies to encourage more immigration are the
“solution.”
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TEN
An Aging Population Isn’t the Reason
Lots of things go wrong when a nation’s population gets older,

and not just for the people doing the aging. An older population
places greater stress on a country’s social insurance and health care
systems. It can cause a shortage of workers and push up wages. And
it can lead to a decline in capital investment, which can result in di-
minished economic growth. Some observers say that an aging popu-
lation also reduces a nation’s innovation and entrepreneurship.
Some academics, journalists, and policy makers have recently
put forward a hypothesis for the decline in employer firm formation
in the United States: more old people. The nation’s demographics
have begun to work against entrepreneurship. Compared to three
decades ago, fewer people are of the age when most people start
companies. The shifting age distribution, they argue, results in lower
startup rates.
It is an intriguing hypothesis, and there is some evidence for it.
A few observers have noted that the fraction of the U.S. population
between the ages of thirty-five and forty-four and the rate of new
employer firm formation correlate positively in some time periods.
If these commentators are right, policy makers should try to coun-
teract the aging of the population. How? It brings us back to the pol-
icy suggestions of the previous chapter. Boosting immigration is one
of the few ways we can affect the average age of the U.S. population.
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A N A G I N G P O P U L AT I O N I S N ’ T T H E R E A S O N
So maybe there is a different reason to promote immigration. It’s

not that immigrants are more likely to start companies than the na-
tive born, but that younger people are more likely to found busi-
nesses than older ones. Encouraging immigration would increase the
pool of people at prime startup age. Organizations like the Kauffman
Foundation advocate immigration reform to boost entrepreneurship
in America for precisely this reason.
But changing the nation’s immigration policy is a big deal. As
we saw in chapter 9, there is no evidence that bringing in more im-
migrants would increase the rate of employer businesses formation.
Before we liberalize immigration in the hope of boosting entrepre-
neurship by increasing the number of young Americans, we should
at least look for evidence of a causal link between the aging of the
population and declining rates of entrepreneurship.
Unfortunately, several observers have found evidence that under-
cuts this hypothesis. They point out that the changes in rates of entre-
preneurship started too early for aging of the population to be the true
cause. The decline in the rate of employer firm formation predates
the decrease in the fraction of the population between thirty-five
and forty-four—the prime age for starting a company—by nearly
two decades. In addition, many measures of entrepreneurship have
increased since 2000, a period when the fraction of the population
between thirty-five and forty-four began to slide. Since there is no
good reason why aging of the population would increase some mea-
sures of entrepreneurship and decrease others, the negative associa-
tion with employer firm formation in some time periods looks like
an accidental correlation.
Once again, we need to consider whether this explanation for the
decline in new employer firm formation justifies government inter-
vention. If there is little evidence that the aging of the U.S. population
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is contributing to the decline in employer firm formation, efforts to

lower the average age are probably unwarranted—at least for this
purpose.
The Argument
Let’s first examine the aging-population hypothesis. Younger peo-
ple are more innovative, creative, and willing to take risks than older
people, and thus they are more likely to start businesses.1 Moreover,
when older people occupy a lot of jobs and remain in them for many
years, younger people are less able to develop the technical skills or
customer contacts they need to start businesses.2 As birth rates have
fallen and life expectancies have grown, the U.S. population has
become older, reducing the fraction of young people. The declin-
ing share of young people has resulted in a decline in new business
formation.3
It is a logical argument. But does the evidence support it?
The Evidence for the Hypothesis

Observers who believe that the aging of the population has con-
tributed to the decline in the rate of entrepreneurship point to three
pieces of evidence. First, as we know well, the rate of creation of new
employer businesses has declined since the late 1990s, and the frac-
tion of the American population between the ages of thirty-five and
forty-four also has gone down. The second trend might have caused
the first. Fewer people at an age when people tend to start businesses
could lead to fewer companies getting started.
Second, proponents of the aging-population hypothesis point to
cross-country comparisons of startup rates. Perhaps the best work
in this area has been conducted by Stanford economist Ed Lazear
and two economists at Peking University, James Liang and Hui
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Wang, who together examined data from the Global Entrepreneur-

ship Monitor, a data set that covers the adult age populations of
eighty-two countries from 2000 to 2010. Using complex statistical
techniques to control for a variety of different factors, Lazear and
his colleagues found that countries with older populations tend to
have less entrepreneurial activity. They write that “a one-standard-
deviation decrease in the median age of a country increases the rate
of new business formation by 2.5 percentage points, which is about
forty percent of the mean rate.”4
A third piece of evidence comes from data on entrepreneurial
activity over time in countries other than the United States. Many
countries, like Japan and much of Europe, have aging populations as
well as declining rates of entrepreneurship.5 Some observers view this
correlation as a sign that the aging of the population is causing the
decline in entrepreneurship.
The Counterargument
The evidence above is weaker than it may appear at first glance.
To begin with, if you look at the aging of the U.S. population and the
rate of employer firm formation over a longer period—from the 1970s
to today—there is little evidence of a negative correlation. While the
trend is present since the 1990s, it isn’t there earlier. Over the whole
period from 1977 to 2013, there is no correlation between the average
age of the population and the rate of employer firm formation.
One reason for the nonexistent correlation is that the two trends
have occurred at different times. Fivethirtyeight business reporter
Ben Casselman plotted the rate of employer firm formation against
the proportion of the population of startup age in an article for the
online publication. He found that the decline in the rate of employer
firm formation began a couple of decades before the proportion of
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the population at prime startup age began to fall. As Casselman put

it, “Whatever is driving down the startup rate, it began long before
the boomers began to age out of their prime entrepreneurial years.”6
Ian Hathaway and Robert Litan, whose work we have discussed
in earlier chapters, examined the statistical relationship between new
employer firm formation rate and the age distribution of the Ameri-
can population from 1977 to 2013 using sophisticated econometric
techniques. Their analysis yielded the same results as Casselman’s
simple chart: they report that they saw no evidence for an effect of
population aging on rates of entrepreneurship.7
A second reason to doubt the correlation between aging of the
population and the rate of entrepreneurship is that for the past few
decades, employer firm formation has been declining across all age
groups except teens.8 This pattern holds across other countries as well.
Analysis of the Global Entrepreneurship Monitor data by Lazear and
his colleagues at Peking University showed that countries with an
older population tend to have lower rates of entrepreneurship “at ev-
ery age.”9 This pattern suggests that something other than the aging
of the population is driving the decline in entrepreneurship.
That something could be overall economic conditions. In coun-
tries that have had decades of slow economic growth, people may be
more reluctant to have children because they think the economy may
not support a good life for them. The same slow-growth countries
might have fewer people starting businesses (at all ages) because the
slow growth leads fewer people to think that they can make new
companies successful. The result is that slow-growth countries have
both older populations and less entrepreneurship. But one does not
cause the other.
Another data pattern inconsistent with the aging-population
argument is that rates of entrepreneurship appear to have fallen
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most among young people. The Wall Street Journal looked into this
question by examining data collected by our nation’s central bank.
Using the Federal Reserve’s Survey of Consumer Finances, an every-
three-year examination of the financial position of American house-
holds, the Journal reported that the business-owning share of house-
holds headed by a person below age thirty fell from nearly 11 percent
in 1989 to less than 4 percent in 2013.10
The Kauffman Foundation noted the same pattern. It found that
in 1996, 34.8 percent of new company founders were aged twenty to
thirty-four; but only 22.7 percent were of that age in 2013.11 This is a
key clue. Aging of the American population is unlikely to explain the
decline in rates of entrepreneurship if business creation is falling fast-
est among the youngest members of the population. The segment of
the population whose entrepreneurial activity is increasing is older
citizens. The rate at which people ages forty-five to fifty-four tend
to start and run their own businesses has actually gone up in recent
decades.12 Taken together, these data patterns suggest that the aging
of the population is not really problematic for entrepreneurship.
A final problem with the age argument is the same issue we have
seen with other potential explanations for trends in entrepreneurship.
Unlike the employer firm formation rate, other measures of entre-
preneurship have been increasing. Because the share of the popula-
tion of prime entrepreneurship age (thirty-five to forty-four) peaked
in 1998 and has since declined, that fraction is negatively correlated
with several measures of entrepreneurship. For instance, from 1998
to 2013, the number of non-employer businesses increased 28 per-
cent. The share of individual tax returns with the self-employment
tax deduction rose 16.4 percent. The number of business tax returns
per thousand people increased 19.6 percent. The share of individual
tax returns with business income or loss went up 36.8 percent. The
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number of sole proprietorships increased 20.8 percent. The number

of corporations per thousand people rose 5.7 percent. The number of
partnerships per thousand Americans went up 61.2 percent. In short,
six important measures of entrepreneurship went up while the frac-
tion of Americans of prime entrepreneurship age was falling. Con-
fronted with that kind of evidence, the aging-population story falls
apart. If anything, the decline in the fraction of the population in
the thirty-five to forty-four age group is associated with an increase
in entrepreneurship.
1. From 1978 to 2013, there is no evidence of a correlation

between the aging of the population and the rate of new
employer firm formation.
2. The decline in the new employer firm formation rate be-
gan two decades before the proportion of the population
between the ages of thirty-five and forty-four began to
decline.
3. Over the past several decades, new firm formation has de-
clined across all age groups except teens, with the greatest
fall among young people.
4. Since 1998, the share of the population aged thirty-five to
forty-five—the prime age for business creation—has de-
clined, while all of the following measures of entrepreneur-
ship have increased: the number of non-employer businesses;
the share of individual tax returns with the self-employment
tax deduction; the number of business tax returns per thou-
sand people; the share of individual tax returns with busi-
ness income or loss; the number of sole proprietorships; the
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number of corporations per thousand people; and the num-

ber of partnerships per thousand people.
America is getting older, and that has some entrepreneurship ad-

vocates concerned. Risk taking, creativity, and innovation all decline
as people age, leading these advocates to worry that the aging of the
population has caused the decline in employer firm formation. To
combat the decline, they have called for boosting immigration and
other policies to reduce the average age of the American population.
It is a flawed recommendation. True, there is a correlation be-
tween employer firm formation rates and the share of the popula-
tion aged thirty-five to forty-four in the United States since 1998.
Similar correlations exist between the aging of the population and
entrepreneurship rates in Europe and Japan; and there is a negative
correlation everywhere between median population age and rates of
entrepreneurship. But overall, the evidence indicates that the aging
of the population is not a cause of the decline in employer startups.
The correlation between the aging of the population and the
rate of employer firm formation does not hold up over longer pe-
riods. Employer startups began to decline two decades before the
thirty-five-to-forty-four age group began falling as a proportion of
the population. Moreover, rates of firm formation have declined
across all age groups except teens for several decades, and they have
fallen most among young people. Furthermore, even while the share
of the population aged thirty-five to forty-four was declining, many
measures of entrepreneurship were going up.
Population aging isn’t the cause of the decline in new employer
firm formation rates over the past three-plus decades. It isn’t even
one of the causes. We have to keep looking.
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ELEVEN
Slowing Population Growth
Isn’t the Explanation
One interesting explanation for the decline in employer firm for-

mation is a slowdown in population growth. If you are not a profes-
sional economist, the argument might not be intuitive to you. It goes
like this: Because people aren’t having as many kids as they did in the
1970s and earlier, the American population is growing more slowly
than a generation ago. That decline in population reduces both the
supply of entrepreneurs and the demand for them. Together, these
two effects make for a decline in the number of business creators, as
measured by the rate of new employer firm formation.
Is there anything to this argument?
Although there is some suggestive evidence for a connection be-
tween slowing population growth and the decline in employer firm
formation, for the most part the data do not support it. Before I ex-
plain why, I want to outline the slower-population-growth hypoth-
esis and the evidence for it.
The Argument That Slower Labor

Force Growth Is Responsible
A slow increase in the American population affects both supply
and demand. On the supply side, when the population is growing
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P O P U L AT I O N G R O W T H I S N ’ T T H E E X P L A N AT I O N
more slowly, fewer people are being added to the labor force. That
means fewer people who engage in any economic activity, including
starting businesses.
Some argue that slower population growth has also pushed wages
up, because reducing the supply of labor puts upward pressure on its
price. Higher wages reduce the expected profits from entrepreneurial
activity and so reduce the rate of employer firm formation. Would-be
entrepreneurs respond to the lower potential for profit by becoming
less likely to start businesses.1
A declining rate of population growth also slows new employer
firm formation on the demand side. When the population grows,
someone needs to provide those added people with pizza, televisions,
car seats, haircuts, household cleaners, and so on. Slower population
growth means less growth in demand. While some of that reduced
demand translates into lesser sales at existing firms, it also lowers the
need for new companies.2
The Importance of the Question

This straightforward argument raises several important issues for
our friends in Washington. First, the cause of the decline in new em-
ployer firm formation might be something that policy makers cannot
counteract. It is simply beyond their control. If the cause is slowing
population growth, for instance, policy makers might not have any
tools to respond. We might just have to accept a rate of new employer
firm formation far below that of the late 1970s as the new normal.
Increasing immigration and getting people to have more kids are
really policy makers’ only choices when it comes to boosting popula-
tion growth. While our elected officials might pass laws that boost
immigration, they cannot easily get people to reproduce. The de-
sire to have kids depends greatly on cultural forces that government
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incentives cannot alter easily. And because immigrants are a small

fraction of the population, massive changes in immigration policies
would be necessary to offset a decline in the birth rate and drive up
population growth.
(Policy makers would love to boost the growth of the popula-
tion for reasons having little to do with entrepreneurship. A growing
population means a growing labor force. With a growing labor force,
it is easier to maintain a rising GDP and the rising living standards
that go with it.3 But that question is beyond the scope of this book.)
Second, a population growth– entrepreneurship rate relationship
raises a high hurdle for government intervention. Whatever policy
makers do to alter the growth rate of the population, they should try
to do with some understanding of what their efforts will and will not
accomplish. My purpose here is not to address this issue compre-
hensively but to make a specific point: if our elected officials cannot
easily offset the decline in the rate of employer firm formation, they
might not want to try. Not only will any potential policy choices
likely have unpredictable adverse consequences, but we might also
need massive government interventions to generate even a small im-
provement in the new employer firm formation rate.
But before we worry about all that, let’s see if slowing population
growth is really behind the slowdown in new employer firm forma-
tion rates in recent decades.
What the Evidence Shows

There is, without a doubt, some evidence that slowing popu-
lation growth is responsible for the falling rate of employer firm
formation. Fatih Karahan, Benjamin Pugsley, and Aysegul Sahin,
researchers at the Federal Reserve Bank of New York, have examined
the causes of the three-plus decade decline. Using complex statistical
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models to look at the correlation between the population growth rate

and employer startups, they found that each 1 percent decline in the
growth rate of the working age population leads to the same decline
in the rate at which employer businesses are created.4
Other researchers have corroborated this finding by comparing
different regions of the country. Ian Hathaway and Robert Litan of
the Brookings Institution looked at population growth rates and
rates of employer firm formation across parts of the country and
found that historically “the firm formation rate tended to be higher
in regions that experienced greater population growth.”5
The Challenge to the Argument

The population-growth argument is plausible and has some sup-
port from the data, but there are three problems with it. The first is
that the rate of new employer business creation is actually dropping
relative to the population. To illustrate this point I want to high-
light a graph that appeared in chapter 1, showing the rate of cre-
ation of employer businesses on a per capita basis. Americans created
1.29 employer businesses for every 10,000 people in the country in
2013, down from 2.56 in 1977 (figure 11.1).
If new employer firm formation has dropped by half when mea-
sured on a per capita basis, it means the entire drop cannot be ac-
counted for by a decline in population growth. Something else is
causing Americans to cut back on employer startups.
We can compare the rate of employer firm formation to other
key labor force measures to see if particular parts of the population-
growth argument are consistent with the data. One hypothesis is that
changes in the labor force mean that a smaller share of the popula-
tion is working now than four decades ago. Maybe more Americans
are retired, disabled, in school, incarcerated, or otherwise unable to
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Figure 11.1. New Employer Firms per Thousand People

join the labor force than in the 1970s. Lower labor force participation
implies less entrepreneurship because it means Americans are doing
less work of any kind.
The data do not support this hypothesis. The changes in the
labor force participation rate do not appear to be correlated with
the decline in employer startups. Between 1977 and 2013, the labor
force participation rate and the rate of employer firm formation are
correlated at only 0.19, which is pretty low (figure 11.2).
If we break down the numbers by time periods, we can see the
lack of relationship in better detail. From 1982 to 2000, labor force
participation grew from 57.2 percent to 64.4 percent. But during
the same period, the per capita rate of employer firm formation de-
creased from 1.93 to 1.71.6
What if we compare the rate of employer firm formation with
the total number of people employed? This is a way of looking at the
population growth argument that is adjusted for labor force partici-
pation. This comparison strips out the effect of more people being
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Figure 11.2. Employer Firm Formation per Capita

and Labor Force Participation
Source: Created from data from the U.S. Census and the Bureau of Labor Statistics.
out of work or incarcerated to show how increasing the number

of potential entrepreneurs affects the rate of creation of employer
businesses.
The result shows little support for the population-growth hypoth-
esis. The rate of employer firm formation has gone down by more
than half when measured against the number of people employed
in the economy over the past three and a half decades. It has also
declined by nearly half compared to the civilian labor force. In 1977,
2.6 new businesses with employees were started for every thousand
people in the labor force. In 2013, it was 1.3 for every thousand.7
The numbers are similar when compared to the number of peo-
ple actually employed. In 1977, 6 new employer firms were formed
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for every thousand people working in the United States. By 2013, the
number was down to 2.81 (figure 11.3).
In short, it is difficult to see evidence that the decline in the
population has caused a fall in the rate of new employer firm forma-
tion. Few correlations suggest that pattern.
The second problem with the population-growth argument is
that it depends on the assumption that entrepreneurial ventures have
become less profitable, but they have not. As I explained above, a key
mechanism behind this argument is that lower population growth,
combined with a smaller fraction of the population participating
in the labor force, has pushed wages up. These higher wages have
reduced the profitability of entrepreneurial activity, and the expec-
tation of lower profits leads fewer would-be entrepreneurs to start
employer businesses.
Figure 11.3. Employer Startups per Thousand Employed People

Source: Created from data from the U.S. Census and the Bureau of Labor Statistics.
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But as we saw in chapter 5, entrepreneurial activity has become

more profitable, not less, in recent decades. Average profits at Ameri-
can businesses increased by nearly 200 percent in inflation-adjusted
terms between 1980 and 2012. And it is not just the earnings at big
companies driving the numbers. Measures of earnings at Subchap-
ter S corporations and sole proprietorships—meaning small busi-
nesses—are also up. Moreover, the share of individual taxpayers’
income that comes from entrepreneurial activity more than tripled
between 1981 and 2013.
The rising profits of American small businesses make it hard to
believe that slowing population growth is responsible for the decline
in employer firm formation. If lower population growth has meant
higher wages, which deter would-be entrepreneurs by reducing their
profit expectations, then we should see profits actually declining.
Why would potential entrepreneurs expect profits to decline, from
higher wages or any other cause, when it is clearly apparent that they
are rising? Much more plausible is the idea that higher wages led to
a shift toward non-employer businesses so that entrepreneurs could
maintain their profits, something we will explore in a later chapter.
A final problem with the argument that slowing population
growth is behind the decline in entrepreneurship is once again that
entrepreneurship has not declined. What has gone down is the rate
of creation of employer businesses. Many measures of new business
creation—the number of non-employers per capita, the share of
individual tax returns with the self-employment tax deduction, the
share of individual tax returns with business income or loss, and the
number of sole proprietorships, partnerships, and corporations per
capita—have increased substantially over the past several decades
(see chapter 2).
Slowing population growth cannot account for a decline in en-
trepreneurial activity if it coincides with a rise in all these measures
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of entrepreneurship. At most, slowing population growth has shifted

people away from starting businesses with employees to starting those
without. But absent a theory for why that would occur, attributing
the patterns to population growth makes little sense.
1. Some evidence suggests that each 1 percent decline in the

growth rate of the working age population leads to a 1 per-
cent decline in the rate of employer business formation.
2. The employer firm formation rate has declined by roughly
50 percent on a per capita basis between 1977 and 2013.
3. The ratio of new firms to the number of people employed
has decreased by more than 50 percent over the past three-
plus decades.
4. There is very little correlation between the employer firm
formation rate and the labor force participation rate over
the past thirty-six years.
5. Numerous measures of entrepreneurship have increased in
recent decades, despite declines in the rate of population
growth.
6. The profitability of entrepreneurial activity has increased
in the past three-plus decades, a pattern inconsistent with
the argument that a decline in the population growth rate
reduced the incentive to engage in entrepreneurship by re-
ducing potential profits from running a business.
Some economists have argued that slower population growth

is responsible for the decline in employer firm formation rates over
three-plus decades. Their argument is based on the idea that de-
clining population growth has reduced the incentive to start new
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businesses because it has caused the profitability of entrepreneurship

to decline. But running a business is much more profitable now than
it was three decades ago. Moreover, most measures of entrepreneur-
ship do not show evidence of a decline in recent decades.
And the patterns of employer business formation are inconsistent
with the population-growth hypothesis. The labor force participation
rate and the employer firm formation rate are barely correlated over
time. The ratio of employer firm formation to the number of people
employed shows a decline of over 50 percent over the past thirty-six
years, and the rate of employer firm formation has fallen on both
per capita and per employee bases. If slower population growth were
causing there to be fewer employer startups, employer firm forma-
tion per capita and per employee would be constant, not declining.
In short, another hypothesis for the decline in the rate of new
employer firm formation over the past three and a half decades is
rejected. Slowing population growth isn’t the cause of the downshift,
or even a cause.
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T W E LV E
Rising Student Debt Is Not the Cause
In recent years, student debt has come under increasing scrutiny.

In addition to all the other problems it creates, some have argued
that it is a cause, or even the cause, of the decline in employer firm
formation rates. Forget access to credit, regulation, taxes, immigra-
tion, demographics, and the host of other factors we have already
discussed. “A rather more obvious suspect,” writes management
consultant and Forbes columnist Steve Denning, “is the burden of
Americans’ $1.2 trillion in student loan debt.”1
Purdue University president Mitch Daniels says pretty much the
same thing. In a Wall Street Journal opinion piece, he placed the
blame for the drop in new employer businesses squarely on rising
student debt.2
Student debt is said to be a problem for three reasons. First,
people laden down with debt are dependent on current income
to make loan payments and therefore are unlikely to shift to start-
ing businesses where their income might be too variable to enable
them to service their loans. People who would have started compa-
nies were they debt-free are forced to delay or refrain from starting
them at all.
Second, these potential entrepreneurs cannot amass the savings
or tap the credit necessary to launch companies. “Would-be entre-
preneurs are seeing loan payments eat up cash that might be used for
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RISING STUDENT DEBT IS NOT THE CAUSE
startup costs, or that would serve as cash flow for a new company,” the
Kauffman Foundation’s Arnobio Morelix told the Associated Press.
“Debt also affects credit scores, hurting an entrepreneur’s chances of
getting a business loan,” he adds.3
The third adverse effect, observers like Denning argue, is that ex-
cessive student debt is making Americans risk averse, hindering their
willingness to change jobs, relocate, or start companies.
All of this is bad news for America, this group argues. As Den-
ning put it in another column, “Student debt is . . . crushing the
entrepreneurship that America needs for its prosperity.”4 So central
is the problem of student debt, he writes, that “unless lawmakers
across the country take radical action to address the skyrocketing
cost of college, and attendant student debt burden, we can expect
U.S. entrepreneurship to continue its frightening decline.”5 It could
even die out entirely.
This issue is leading some prominent observers to call for strong
policy interventions. Rensselaer Polytechnic Institute president Shir-
ley Ann Jackson suggests that the government forgive the student
debt of anyone who starts a business.6 Others propose lowering in-
terest rates on student loans to give would-be entrepreneurs lower
monthly payments, leaving more cash for business formation. Still
others think the government should eliminate restrictions on dis-
charging student loan debt through bankruptcy or expand programs
that defer payments until the borrower’s income reaches a certain
level. The Obama administration called for reducing the student
loan burden in order to increase entrepreneurial activity and under-
took executive actions to reduce the student debt burden.7
Once again we must consider whether these arguments reflect
reality. As this chapter will show, there is little evidence that student
debt is the cause of the decline in employer firm formation rates in
recent decades.
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The Supporting Evidence

Even the best case for student debt as an explanation for declin-
ing rates of entrepreneurship is a tough argument to make. Propo-
nents of the hypothesis are positing that many young people would
have become entrepreneurs had they not had so much student debt.
But because it is impossible to observe what these people would have
done were they not in debt, we are forced to rely on what people say
they would have done. In the Gallup-Purdue Index, a web-based
nationwide survey of 30,000 college graduates conducted in 2015,
12 percent of respondents with student loan debt told the researchers
they have put off starting a business because of that debt.8 Millennials
in particular say they are adversely affected. They report that college
debt is their biggest obstacle to going into business for themselves,
according to a survey conducted on behalf of two advocacy organiza-
tions, the Small Business Majority and Young Invincibles.9
Other statistics also provide some support for this argument. For
instance, over the past three and a half decades, while new employer
business formation has been falling, student debt has been rising.
The per capita rate of employer firm formation and the inflation-
adjusted level of average federal and nonfederal student loans per
full-time-equivalent student correlate −0.63 from 1977 to 2013. Be-
cause a correlation of 1.00 means that two measures move in per-
fect concert and a correlation of −1.00 means they move in perfect
opposition to each other, this pattern suggests a relationship between
these two values—though it does not, of course, tell us what the re-
lationship is.
Self-employed people are also less likely to have student debt than
those who are not self-employed. A study conducted for the Office of
Advocacy of the Small Business Administration used data from the
Federal Reserve’s Survey of Consumer Finances to compare student
debt levels in households led by people who were self-employed and
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those led by people who were not. It found that in 2012, 34 percent
of self-employed people under forty had student debt, compared to
38 percent of non-self-employed people of the same age.10
Simple correlations like these, however, tell us nothing about the
myriad of other factors that could be influencing these trends. Two
Northeastern University researchers, Karthik Krishnan and Pinshuo
Wang, recently made a more sophisticated examination of the link
between student loan levels and the tendency to start a business, us-
ing data on student debt and entrepreneurship from the Survey of
Consumer Finances. Krishnan and Wang found that heads of house-
holds with more student debt are less likely to start businesses than
those with less. They estimated that an increase in student debt from
$0 to $35,000 reduces the odds of starting a business by three per-
centage points, after controlling for other characteristics.11
Other scholars find similar patterns, albeit in different ways.
Three economists at the Federal Reserve Bank of Philadelphia, Brent
Ambrose, Larry Cordell, and Shuwei Ma, looked at the correlation
between student debt levels across different U.S. counties and the
change in the number of businesses with one to four employees in
those counties between 2000 and 2010. They found that average
student debt levels in each county correlate with the decline in the
number of micro businesses.12 Counties where there was more debt
saw a greater decline in the number of micro businesses.
The Argument Is Less Convincing Than at First Glance

These studies have convinced many people that rising student
debt levels are responsible for falling rates of new employer firm
formation. Careful investigation, however, shows the limitations of
the argument and evidence. There are several reasons why student
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loan debt is an unlikely explanation for the decline in employer

startups.
There’s a Counterargument
The first challenge to the rising-student-debt argument is that
student debt should actually increase rates of business formation. The
advocates of the student debt hypothesis generally argue that student
debt should make it more difficult for would-be entrepreneurs to
finance their startup efforts, but student debt plays another, more
positive, role in entrepreneurship. By taking on debt, people enable
themselves to go to college when they otherwise could not, and that
education increases their chances of becoming entrepreneurs. Here’s
why: two of the big triggers of starting a business are who you know
and what you know. While in college, students meet others who
can help them to start companies— customers, suppliers, investors,
cofounders, or employees. The knowledge they gain, whether it is
learning how to keep financial records, how to present well to in-
vestors, or how to manage employees, makes them more capable of
starting businesses. Finally, a college education allows some people
to develop ideas for new businesses and to gain the confidence they
need to take the startup plunge.
Because borrowing is how many students afford higher educa-
tion, a higher level of student debt means that more people have
gained the knowledge and networks they need to become entrepre-
neurs. That access to information and contacts might outweigh the
negative effects of higher debt levels on entrepreneurial activity. As
Sandy Baum, a researcher at the Urban Institute, wrote in a report
published in 2015, “The positive effects of education might be stron-
ger than the negative effects of debt and liquidity constraints on the
probability of engaging in entrepreneurial activity.”13
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Only Employer Formation Rates Have Fallen

The second challenge to the argument that rising student debt
levels are responsible for the fall in employer firm formation is the
observed data. I want to emphasize once again that not all measures
of entrepreneurship have declined in recent decades. Many measures
of entrepreneurship tell a very different story from the one told by
the trend in employer firm formation.
If we compare the measures of entrepreneurship discussed in
chapter 2 to student debt levels, we can see that student debt has a
net positive effect on rates of entrepreneurship. For example, the per
capita number of sole proprietorships and inflation-adjusted student
loan levels correlate positive 0.77 from 1980 to 2013. The correlation
is particularly strong since 1995 (figure 12.1).
Moreover, sole proprietorships per capita are not even the mea-
sure of entrepreneurship most strongly correlated with student loan
levels. The correlation is even stronger for the fraction of individual
Figure 12.1. Student Loan Levels and Sole Proprietorships

Source: Created from data from the Internal Revenue Service and the College Board.
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tax returns with business income and loss (0.83) and for use of self-
employment tax deductions (0.85).
Clearly, the negative correlation between student debt and em-
ployer firm formation rates is not telling the entire story about the
relationship between college debt and entrepreneurial activity. That’s
a problem for those who posit a simple cause-and-effect relationship
between student debt and a lack of new employer businesses. For
student debt levels to have adversely affected entrepreneurship, the
relationship between debt and business formation would have to be
far more complex than the simple story presented by the advocates
of this view.
The only way to reconcile the positive correlation of student
debt levels with many measures of entrepreneurship and the negative
correlation with new employer firm formation rates is to argue that
higher student debt causes people to start different kinds of compa-
nies. Would-be entrepreneurs would have to be somehow persuaded
to change from starting employer businesses to starting businesses
without employees.
That shift seems unlikely, given how proponents of the student-
debt hypothesis say debt operates. Rising debt means would-be en-
trepreneurs can’t save or borrow to start businesses. A lack of money
doesn’t differentiate between businesses with employees and those
without. If student loan debt blocks would-be entrepreneurs from
access to capital, then the increase in real debt levels should have
caused a decline in the rate of formation of all kinds of new compa-
nies, not just those with paid workers. And we do not see that.
The Timing Is Wrong

A third problem with the argument that student debt has caused
a decline in entrepreneurship is the poor match between the timing
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of the rise in student debt and that of the decline in employer firm
formation. Student debt didn’t really start to increase until the early
1990s. In fact, in 1992, it was 15 percent lower than in 1977 when
corrected for inflation. But the per capita rate of employer firm
formation during those same years declined by 29 percent, or an
average of 1.9 percent per year.14 If rising student debt were really
the culprit, employer firm formation should have risen between 1977
and 1992.
Now let’s look at what has happened since 1992. Between that
year and 2013, the rate of new employer firm formation decreased
23 percent, an average of 1.1 percent per year. Although that is a size-
able decline, it is less than half the average annual rate of decline from
1977 to 1992. In other words, since 1992, the decline in new employer
firm formation has moderated—just when student debt levels were
starting to take off. Between 1992 and 2013, the per capita amount
of student debt more than doubled in inflation-adjusted terms. In
short, when employer firm formation was declining the most, stu-
dent debt levels hardly budged, but when student debt took off, em-
ployer firm formation moderated its decline (figure 12.2).
In addition, between 1992 and 1995, the level of student loan
debt jumped dramatically without triggering a significant fall in the
employer firm formation rate. And since 2007, average student loan
levels have actually declined in inflation-adjusted terms. But em-
ployer firm formation rates have continued to decrease.
No Evidence That Student Loan Debt Influences Risk Aversion

A final claim made by proponents of a link between higher stu-
dent debt and falling rates of employer startups is that higher levels
of student debt are making Americans more risk averse and thus less
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Figure 12.2. Rate of Formation of New Employers and Student Loan Debt
Source: Created from data from the U.S. Census and the College Board.
likely to start businesses. While this is an intriguing argument, the

empirical evidence does not support it. There is no sign that risk
taking has declined in the United States in recent years. Surveys of
Americans’ attitudes show no rise in risk aversion. Similarly, data on
the frequency with which people undertake risky activities, such as
investing in high-risk assets or engaging in unsafe practices like un-
protected sex, have not declined in recent years. Without evidence
that Americans have become more risk averse, it is hard to credit the
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claim that higher student debt has made them risk averse or that this
is behind the fall in employer firm formation.
What Does the Evidence Really Tell Us?

Given these difficulties with the argument that student debt is
behind the decline in employer firm formation, how do we explain
the findings from the careful academic studies that show a negative
relation between student debt levels and business formation? The
answer, I think, lies in understanding what these studies measure
and what they don’t, looking at what else might explain the patterns
these authors found, and then reconciling their findings with what
else we know about changes in rates of entrepreneurship and levels
of student debt.
The two best pieces of empirical evidence that suggest a rela-
tion between student debt and business creation—the studies by the
Northeastern University and Philadelphia Fed researchers— don’t
actually show that rising levels of student loan debt are causing the
decline in business formation. (And to be fair, the scholars undertak-
ing the studies don’t make that claim. People in advocacy groups
have overstated the findings to advance a political agenda.) They
look only at correlations. As with all such studies, a third factor could
be causing both student loan levels and rates of business formation to
change. For instance, bad economic times could force more people
to borrow to pay for college and also make it more difficult to start
a business.
Similarly, a long-term change in family resources might be af-
fecting both student debt levels and the willingness to start busi-
nesses. People whose parents have enough money to pay for their
college education, for instance, are both less likely to have student
debt and more likely to have a support infrastructure for starting a
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business. The student debt level itself is not the impediment to new
business formation; it is merely a product of other factors that are
also encouraging or discouraging entrepreneurship.
Moreover, these studies do not even show the correlation over
time between student debt levels and the rate of business formation.
The Northeastern University study shows that households with more
student debt are less likely to start companies than households with
less. This could be true even if the effect of student debt on the odds
of starting a company are too small to appreciably change the rate of
employer business formation.
It is also possible that the effect of student debt on the odds of
starting a business varies over time. Households with more student
debt might always be less likely to start companies, but today’s entre-
preneurs might be willing to start companies with more student debt
than yesterday’s entrepreneurs.
The Philadelphia Fed study is limited in scope. Those econo-
mists examined how the average level of student debt in a county af-
fected the formation of businesses with one to four employees. That
is, they studied the effect of student debt on the stock of micro busi-
nesses in an area. They told the Wall Street Journal that they found
no effect of student loan debt on the number of larger startups.15
Companies with fewer than five workers are very small enterprises,
and they are very different from companies with twenty or so em-
ployees. It is entirely possible that student debt adversely affects only
the number of micro businesses, not the number of small companies
in general.
It is also possible that student debt reduces the number of busi-
nesses with one to four employees but not the rate of creation of
those businesses. Student debt might be having an adverse impact on
business survival, not business formation.
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1. The per capita rate of creation of new employer businesses

and the real per student level of college debt correlate nega-
tively over the period 1977 to 2013.
2. The rise in student debt correlates positively with an in-
crease in non-employer businesses and IRS measures of
small and new businesses over the same period.
3. If student debt is causing a decline in employer firm forma-
tion, increases in student debt levels should be followed by
declines in employer firm formation, but these patterns are
not present in the data.
4. There is no evidence that student debt levels have increased
Americans’ level of risk aversion, or that an increase in risk
aversion has led to a decline in entrepreneurial activity.
Several policy makers and pundits have argued that the rise in
student debt levels is responsible for the past few decades’ decline in
employer firm formation. Arguing that student debt levels have kept
would-be entrepreneurs from starting companies by reducing their
savings, credit capacity, and risk-taking propensity, these observers
have called for a series of policy interventions to reduce student debt
in order to stimulate entrepreneurial activity.
Despite some findings that people with higher levels of student
debt are less likely than others to start businesses, student debt levels
do not appear to have caused the decline in employer firm formation.
In fact, taking on student debt may actually increase business forma-
tion by allowing more people access to a college education. Student
debt levels correlate positively with several measures of entrepreneur-
ial activity since 1980. Moreover, the timing of the rise in student
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debt does not fit with the hypotheses that it caused the decline in
employer startups. The rise in student debt has not reduced entre-
preneurship by making Americans more risk averse, for the simple
reason that Americans have not become more risk averse. Finally,
the most sophisticated studies to examine the question do not imply
that student debt levels have reduced Americans’ tendency to start
businesses. They merely show that households with more student
debt are less likely to be business-owning households. In short, ris-
ing student debt levels are not the cause of the decline in the rate of
formation of new employer businesses.
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THIRTEEN
Don’t Blame a Loss of Moxie
Is a loss of moxie to blame for the decline in employer firm for-

mation? Dane Stangler, vice president for research at the Kauffman
Foundation, writes, “Many commentators, observing an overall
decline in the rate of American firm formation, have wondered if
Americans have somehow become more risk averse over time.”1
Stangler and other observers propose that the decline in employer
firm formation over the past three-plus decades stems from a gen-
erational change in attitudes. Americans, they argue, have become
less willing to engage in entrepreneurship. Compared to the Baby
Boomers or the Greatest Generation, Generation X and Millennials
have less moxie. They take fewer risks and try fewer new things, leav-
ing them less predisposed to start businesses than previous genera-
tions of Americans.
In addition, goes the argument, younger Americans view entre-
preneurship with less interest than previous generations. Instead of
having a single-minded focus on work, they are more involved in
family and social causes at the expense of starting companies, a pur-
suit they see as imposing tremendous demands.
Furthermore, for younger people, entrepreneurship and small
business have lost their central place in the American psyche. Ameri-
cans, commentators argue, have become less willing to view business,
including small business, as positively as their parents’ and grandpar-
ents’ generations did.
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D O N ’ T B L A M E A LOSS O F M OX I E
A change in attitudes is a plausible explanation for the decline in

employer firm formation since the 1970s, and it is certainly worthy
of investigation. But as this chapter will explain, it isn’t a likely cause.
Surveys reveal that Americans’ interest in entrepreneurship changed
little over time. No statistics show that Americans have become more
risk averse and therefore less willing to start companies. Interest in
business ownership has risen and fallen with the vagaries of the econ-
omy, but the trend is neither up nor down. Americans’ support for
small business has remained far stronger than their feelings toward
other institutions. Overall, there is little evidence of a loss of moxie.
The Argument
Before we evaluate the hypothesis that Americans have lost their
moxie, I want to clarify the argument itself. The central claim is that
Americans have changed. We are no longer passionate about entre-
preneurship. Our citizens once believed in Horatio Alger stories of
people starting companies and going from rags to riches. We glori-
fied people who started companies and used their grit and determi-
nation to rise out of poverty.
Starting a business meant taking big stomach-churning risks. But
Americans of past generations didn’t look for safe jobs; they didn’t
try to minimize the downside or cut their losses. They reached for
the brass ring. Now, the argument goes, we are not so willing to take
chances. We have become frightened of the unknown. We choose
jobs at big companies instead of setting out on our own. Economist
Ian Hathaway told Inc. magazine that the “pay and perks” at big
firms persuade “fence-sitting” entrepreneurs not to start their own
companies.2
Having grown afraid of failing at their entrepreneurial efforts,
Americans are less willing to try business creation than we once were.
Donna Kelley, a Babson College entrepreneurship professor, told Inc.
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magazine, “The fear of failure . . . can reflect a greater level of caution,

and a preference for more stable employment when there is high un-
certainty and a less favorable environment for entrepreneurship.”3
The policy makers and pundits are posing a hypothesis: the de-
cline in new employer firm formation over the past several decades
stems from a shift in attitudes. As Ian Hathaway and Robert Litan
wrote, “Individuals appear to be more risk averse . . . fewer people
are launching firms.”4
That’s the theory, at least.
The Evidence Disagrees

The argument that changes in attitudes are driving the decline
in employer firm formation is plausible, but the data do not support
it. A search for evidence corroborating any part of this hypothesis
comes up short.
The Decline Is Concentrated in Employer Starts

The most basic issue is one we have discussed already. Entre-
preneurship is not down; only the rate of formation of employer
businesses has declined. Data from both the IRS and Census Bureau
show that more people are engaged in entrepreneurship now than
two and three decades ago (see chapter 2). That makes the cultural-
shift argument difficult to accept. If people have lost interest in en-
trepreneurship, then the total number of entrepreneurs should have
declined, but it hasn’t. It is hard to argue that a loss of moxie has
affected only the formation of businesses with paid workers. There is
nothing inherently more risky about starting a business with a paid
worker than with a contractor.
We have a similar problem trying to argue that a growing fear of
failure has inhibited business startups. If Americans are more afraid
of failing today than they were thirty-plus years ago, we should see
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a decline in all entrepreneurial activities, not merely those with paid

employees. But as we have seen, the rates of business ownership and
non-employer business creation are both up. These patterns are in-
consistent with the idea that Americans are now afraid of failing as
company founders.
American Entrepreneurs Remain Positive about

Business Formation
It would be easier to argue that the fall in employer firm startups
is caused by a change of attitude if there were, in fact, evidence of a
change of attitude: if Americans were becoming less positive about
entrepreneurship than before. Negative attitudes toward entrepre-
neurship could explain why people were less interested in starting
businesses. Continued positive views of entrepreneurship would
make it more difficult to accept a loss of moxie as a convincing ex-
planation for a decline in willingness to start employer businesses.
In exploring this question, we need to tread cautiously: the
data on attitudes toward entrepreneurship do not go back that far.
But over the period for which they are available, there is no evi-
dence that Americans are growing less positively disposed to business
formation.
Wells Fargo and the Gallup Organization have jointly surveyed a
sample of 600 small business owners every quarter since 2003. One
of the things they measure is how satisfied these owners are with the
decision to strike out on their own. They ask the owners, “If you
had it to do all over again, would you still become a small business
owner, or do something else?” In 2003, 81 percent of small business
owners said they would still become a small business owner. In 2014,
the fraction was a statistically similar 84 percent.5
Over the same period, the per capita rate of employer firm for-
mation fell by 25 percent. If small business owners’ dissatisfaction
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with the decision to open their own businesses caused this drop, we
should have seen more dissatisfaction among owners. But we don’t.
Americans Remain Positive about Small Business

as an Institution
Or perhaps the rate of employer firm formation has dropped
because Americans have soured on the concept of small business.
While small, independent businesses might have been something
people loved in the 1980s, today big companies might be more ap-
pealing. The ruthless efficiency of giant corporations might appeal
to Americans who want to get everything—meals, clothing, auto
repair —faster than ever before.
People are more likely to engage in activities that others view
positively versus those that they view negatively. If Americans found
small businesses less appealing, fewer people might want to start
them, leading to a drop in the rate of employer firm formation.
The data do not support this hypothesis. Americans have actually
become more positively disposed to small business as an institution
over the past eighteen years. According to the Gallup Organization,
67 percent of Americans had a “great deal” or “quite a lot” of confi-
dence in small business in 2015. That’s up slightly from 65 percent in
1997.6 It seems Americans’ confidence in small business isn’t related
to their willingness to start new companies with employees.
The rising confidence in small business is all the more surprising
given that Americans’ approval of almost all other institutions has
fallen. The Gallup Organization reports significant declines in confi-
dence in organized religion, the Supreme Court, public schools, tele-
vision news, the presidency, and the police between 1997 and 2015.
Even confidence in banks and big business took a hit over the past
eighteen years.
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In short, the rate of new employer firm formation has shrunk,

but lack of confidence in small business isn’t the reason.
More Americans Intend to Start Companies

If a change in attitudes toward entrepreneurship were the cause
of the decline in new employer firm formation, we would expect to
see fewer Americans intending to go into business for themselves.
But entrepreneurial intentions have been rising in recent years. The
Global Entrepreneurship Monitor, an annual survey, has found that
in 2014, significantly more Americans intended to start a company
in the next three years (12 percent) than had this intention in 2002
(9.2 percent) (figure 13.1). Given that the intention to start a business
and employer firm formation have moved in opposite directions, one
cannot be causing the other. Americans’ plans to become entrepre-
neurs, it seems, are not behind the decline in employer startups.
It’s Not an Unwillingness to Take Risks

Some observers have claimed that Americans are no longer will-
ing to take the risk of starting companies. Americans, one Wall Street
Figure 13.1. Percentage Intending to Start a Business within Three Years

Source: Created from data from the Global Entrepreneurship Monitor.
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Journal article explains, have “a risk-averse culture.” Instead of think-

ing of the potential riches that come from starting companies, they
are focused on avoiding failure.7 But several sources of data show
that Americans aren’t cutting back on risk taking. One measure of
this is how they invest their savings. Between 1989 and 2013, while
the rate of employer business formation was declining, Americans
moved their savings into riskier investments. The Federal Reserve’s
Survey of Consumer Finance shows that Americans systematically
shifted money from certificates of deposit, savings bonds, other
bonds, and cash value life insurance into riskier assets. These four
kinds of investments together accounted for 27.9 percent of Ameri-
can households’ financial assets in 1989, but just 8.2 percent in 2013.8
If Americans really were becoming more risk averse over the last two
and a half decades, they shouldn’t have moved assets out of low risk
financial instruments into higher risk ones.
More direct evidence of Americans’ risk taking comes from a
survey paid for by the European Community and repeated in the
United States several times since the turn of the millennium. Ac-
cording to the Flash Euro Barometer, a periodic survey of people in
numerous countries, American attitudes toward the risk of starting a
business have changed little in the past twelve years. In 2000, 27 per-
cent of Americans agreed with the statement: “One should not start
a business if there is a risk it might fail.” In 2012, the fraction was
statistically the same—28 percent.9 If Americans are truly becoming
more risk averse, more of them should hold this attitude now than
in 2000.
During the thirteen-year period covered by the Euro Flash Ba-
rometer survey, creation of employer businesses per year fell by more
than 23 percent. It is hard to attribute that decline to a rise in the fear
of financial risk.
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Millennials Are Less Interested in Entrepreneurship

than Generation Xers
Some observers argue that young people today are less interested
in starting businesses than their parents were at the same age. We do
not have data on the entrepreneurial interests of all young people,
but we do have it for college students. Since the 1960s, research-
ers at UCLA have conducted an annual survey of incoming fresh-
men at U.S. colleges and universities. They ask about a wide range
of topics, from students’ attitudes on social issues to their intended
major. One question addresses students’ intended occupations. The
fraction of incoming freshmen who intend to be business owners or
entrepreneurs has risen since the late 1970s: 2.3 percent in 2014 versus
1.8 percent in 1977 (figure 13.2).
Figure 13.2. Percentage of Students Intending to

Be Entrepreneurs or Business Owners
Source: Created from data from the Cooperative Institutional Research Program at UCLA.
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More important, however, this result does not correlate with the
rate of employer firm formation. As you can see from the figure,
there have been two periods during which the fraction of college
students intending to become entrepreneurs has risen, followed by
two periods of decline. From 1977 to 1988, the percentage of college
students who said they intended to start their own businesses more
than doubled, from 1.8 percent to 3.9 percent. From 1988 to 1992 it
fell to 2.2 percent. It then rose steadily, reaching 3.6 percent in 2005,
only to decline to 2.3 percent in 2014. These waves of rising and
falling interest in entrepreneurship do not correlate well with the
employer firm formation rate, which hasn’t displayed similar waves
but rather a long downward trend. It seems unlikely that much of a
causal relation exists.
The UCLA survey also asks incoming college freshmen if they
would like to run their own successful business someday. It is a
tougher question to interpret than the one about intended profes-
sion because we don’t know what fraction of respondents focus on
the word “successful” rather than the phrase “business of my own.”
We can probably assume that a fairly small fraction of students plan
to be unsuccessful at whatever they intend to do. Still, the answer to
this question is not consistent with a pattern of long-term decline
in interest in entrepreneurship. The fraction of students express-
ing interest in business ownership rose from 47.1 percent in 1977 to
52.1 percent in 1988, fell to 40.9 percent in 1994, and has more or
less held steady since then (figure 13.3). This pattern is very different
from the steady decline in employer business formation we saw in
chapter 1.
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Figure 13.3. Percentage Interested in Having a Successful Business of One’s Own

Source: Created from data from the Cooperative Institutional Research Program at UCLA.
1. American small business owners are as satisfied with their

choice to go into business for themselves in 2014 as they
were in 2003.
2. The American public has more confidence in small busi-
ness today than it did in 1997 despite having less confi-
dence in many other institutions, including banks and big
business.
3. More Americans said they intended to start businesses in
the next three years in 2014 than in 2002.
4. Americans are no more likely to say that fear of failure keeps
them from starting businesses than they were a decade ago,
and no less willing to take investment risks than they were
twenty-five years ago.
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5. Although American college freshmen are less likely to in-

tend to be successful in a business of their own in 2014 than
they were in 1977, the fraction has been more or less steady
since 1994 and more of them reported that they are likely
to make entrepreneurship their career choice in 2014 than
in 1977.
Although some observers attribute the decline in employer firm

formation to a change in Americans’ attitudes, the data do not sup-
port this explanation. Several surveys show that Americans’ inter-
est in entrepreneurship has changed little over time. Small business
owners are as satisfied with the choice to go into business for them-
selves now as they were a decade ago. The American public has more
confidence in small business today than it did in the late 1990s. More
Americans intend to start a business in the next three years than ex-
pressed the same intention more than a decade ago, and the people
of this country are no more likely to say that fear of failure keeps
them from starting businesses than they were a decade ago. More
American college freshmen today say that they are likely to choose
entrepreneurship as a career than in the late 1970s.
In short, the data suggest that something other than a change in
attitudes accounts for the fall in employer startups over the past sev-
eral decades. If a lack of capital, more regulation, higher taxes, a lack
of immigration, an aging population, declining population growth,
rising student debt, and changing attitudes did not cause the decline,
what did?
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FOURTEEN
Employees Have Become Too Expensive
We have seen many flawed explanations for the decline in the

rate of creation of new employer businesses. It’s time to examine
some that make more sense.
One of the more plausible accounts for the changes in entrepre-
neurial activity that have occurred over the past three-plus decades
is that labor costs have risen too fast. The cost of offering benefits,
particularly employee health insurance, has risen so much over the
past two decades that business owners have cut back on the number
of workers on their payrolls. Fewer entrepreneurs are taking them on
at all, and those who do tend to hire fewer than they once did.
Entrepreneurs are also using technology to automate tasks that
used to require a lot of labor, contracting out work that they once
did in-house, and relying more on their own efforts to do things that
once required paid workers. As a result, American entrepreneurs now
operate with fewer people on the payroll than their counterparts did
two decades ago.
This explanation is not a perfect interpretation of what has hap-
pened (in the next chapter we will see that other forces are also in
play), but it is more consistent with the patterns we have observed
than the accounts I reviewed in chapters 6 through 13. Rising labor
costs combined with the opportunity to use technology and outside
help have had an important effect on American entrepreneurship.
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E M P L O Y E E S H AV E B E C O M E T O O E X P E N S I V E
Total Compensation at Private Sector

Businesses Has Been Rising
It costs much more to employ people today than it did two de-
cades ago, even after adjusting for inflation. Total compensation by
private sector employers has increased in real terms over the past three
decades, from $27.43 per hour (in 2011 dollars) in 1986 to $30.07 in
2015, with a nearly 19 percent rise since 1996 (figure 14.1).
It is important to point out that this rise in compensation doesn’t
mean Americans’ take-home pay has gone up. Workers are actually
doing worse in inflation-adjusted terms. In 1986, the average private
sector worker earned $20.02 per hour (in 2011 dollars). In 2014, she
earned $19.91 (figure 14.2).
But wages are not all that employers pay for: they also pay for
workers’ benefits, and the cost of these ancillaries have been rising.
Figure 14.1. Hourly Private Sector Compensation,

Including Benefits (in 2011 dollars)
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Figure 14.2. Average Hourly Wage and Benefit Costs (in 2011 dollars)
Between 1986 and 2014, the average cost of benefits of private sector
workers have risen 16 percent in inflation-adjusted terms. As a result,
benefits now account for 30.1 percent of private sector compensation,
up from 27 percent in 1986.
The Rising Cost of Employee Health Insurance

The biggest culprit in the rising cost of benefits is the long-term
increase in the cost of providing health insurance for workers. To
get a sense of how small business owners are affected, consider an
American entrepreneur named Tim Anderson. Sixteen years ago,
Tim founded a small air-conditioning maintenance and repair busi-
ness that employs eight technicians. On many levels, it is a successful
business. Last year, on revenues of just under $600,000, Tim cleared
$110,000 in profit.
But despite this success, Tim has been unable to provide his em-
ployees with health insurance. That is not only a problem for his
workers: it hinders his ability to compete with other companies. In
the past year he has lost out on hiring two technicians who went to
work for larger companies because they offered health insurance.
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Tim wants to offer health insurance to his employees, but he can’t

afford it. For himself, his eight employees, and their families, health
care coverage would cost $150,000 per year. Even if he passed off
20 percent of that cost to the employees, providing coverage would
wipe out his profit. So he doesn’t offer it.
The Affordable Care Act was supposed to solve this problem. If
Tim couldn’t provide his employees with health insurance, the gov-
ernment would provide his workers with subsidies to buy insurance
on the new health care exchanges. But even with the subsidies, many
of Tim’s employees cannot afford the coverage.
Part of the problem is a misfit between what they want and what
the government encourages insurers to provide. Tim’s workers are all
young and healthy. They don’t earn a ton of money and they have a
lot of other expenses. And they don’t want to prepay for routine care.
They want coverage against a disaster, much like that provided by
their homeowner’s and auto insurance. They want to protect them-
selves if one of their kids gets very sick and has to go to the hospital,
but they can’t get that kind of coverage, so many didn’t buy health
insurance at all.
The Affordable Care Act (ACA) simply has not solved the prob-
lems of many entrepreneurs. The cost of employee health insurance
has continued to rise. Since the law was enacted, the fraction of en-
trepreneurs offering health insurance to workers continues to slide.
The tremendous rise in health insurance costs over the past two
decades has imposed a financial burden on new and small compa-
nies. Between 1999 and 2015, the cost of employer-sponsored family
health insurance at companies with between 3 and 199 employees
doubled in inflation-adjusted terms, according to the Kaiser Family
Foundation (figure 14.3). The cost for the average new company to
provide its employees with family health insurance is 18 percent more
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Figure 14.3. Annual Small Business Health Care Premium

per Employee for Family Coverage (in 2011 dollars)
Source: Created from data from the Kaiser Family Foundation.
than what large businesses pay for the same coverage. As the trend
line in the figure shows, at best the ACA might have slowed the rate
of increase, but it hasn’t stopped it.
We can see the degree to which health care costs have pinched
American entrepreneurs by comparing the rise in the cost of health
insurance with the change in revenues. Between 1999 and 2012, the
period for which data on both measures is available, the real cost
of family health insurance coverage at businesses with 3 to 199 em-
ployees rose 94 percent, while inflation-adjusted revenues at pro-
prietorships, partnerships, and S corporations increased by just
11.5 percent.1
The fast rise in health insurance costs relative to revenues forces
America’s entrepreneurs to economize on labor. Some entrepreneurs
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have shed employees and reduced others to part-time status. Others

have just given up being in business for themselves.
It’s Not the Increased Cost of Retirement Plans

One might be tempted to attribute this rise in benefits costs
to more than just the increased cost of employee health insurance.
But the numbers don’t really support that claim. True, compared
to three decades ago, American business owners are devoting much
more of their labor costs to funding their employees’ retirement. But
the numbers are so small that they are unlikely to be driving the
changes. Since 1980, the fraction of sole proprietors’ labor costs de-
voted to funding employees’ retirement benefits has almost tripled,
but to only 3.4 percent (figure 14.4). Sole proprietors don’t repre-
sent all small businesses—the larger ones tend to be corporations or
partnerships—but they do account for about three-quarters of all
businesses. So the numbers for sole proprietors tend to drive overall
patterns for small businesses.
Figure 14.4. Pension and Profit Sharing as a Fraction of Labor Costs

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Responses to Rising Labor Costs

Private sector labor compensation has risen significantly in real
terms, largely because of the rising cost of health benefits. Entrepre-
neurs have responded in several ways. One way has been to reduce
benefits, as is apparent in the declining fraction of small businesses
that offer employee health insurance.
The Kaiser Family Foundation, which tracks business health
care coverage, reports that only 46 percent of companies with 3 to
9 employees offered employee health insurance in 2016, down from
55 percent in 1999. For firms with 10 to 24 workers, the fraction of-
fering health benefits was 74 percent in 1999, and only 61 percent
in 2016. For businesses with 25 to 49 workers, 88 percent provided
health coverage in 1999, and 80 percent in 2016.2 Even for all small
businesses with 3 to 199 employees, the numbers are down: 65 percent
of firms offered employee health benefits in 1999, but only 56 percent
did in 2015 (figure 14.5).
Figure 14.5. Percentage of Small Firms Offering Health Benefits

Source: Created from data from the Kaiser Family Foundation.
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The numbers are even lower for new businesses. The Kauffman
Foundation reports that only 29.5 percent of new businesses with
employees provide health insurance to their full-time employees.3
Another way that entrepreneurs have responded to the rising cost
of employee health insurance has been by letting wages fall relative to
those offered by large employers. Small business owners have always
paid less than their larger counterparts, but the wage gap has risen
substantially over the past two and a half decades. Employee com-
pensation at businesses with fewer than 100 workers was 65.3 percent
of that at companies with 500 or more workers in 1990. By 2013, that
figure had fallen to 55.6 percent (figure 14.6).
Figure 14.6. 1–99 Employee Compensation as a

Percentage of 500+ Employee Compensation
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Figure 14.7. Small Business Share of Private Sector Payroll

Payroll data also show the wage gap between big and small firms.
Small business’s share of annual payroll has fallen substantially since
the late 1980s. In 1988, companies with fewer than 500 workers ac-
counted for 48.6 percent of U.S. private sector payroll. In 2011, the
latest year for which data are available, the fraction had fallen to
A third way that America’s entrepreneurs have responded to ris-
ing labor costs has been not to hire workers the way they once did.
One of the biggest trends over the past thirty-six years has been a
declining tendency among people who are in business for themselves
to hire other people to work for them. Compared to a generation
ago, many fewer self-employed people have paid employees. One
simple way to see this is to look at data from the Bureau of Labor
Statistics. In 1995, 20.7 percent of self-employed Americans had em-
ployees. That might not sound like a lot, but remember that a lot
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of self-employed people are running service businesses or are other

types of independent operators who don’t need paid workers. They
either do the work for customers themselves or they hire outside
contractors to help them.
This relatively small number has gotten smaller over time. In
2015, only 14.3 percent of the self-employed had paid workers, and
that number is a jump from 13.5 percent in 2014. Between 1995 and
2009, the fraction of self-employed Americans who hired others
declined almost every year (figure 14.8). Although the number has
grown recently, it is far below its levels in the late 1990s and shows
little sign of returning to what it once was. Over the two decades for
which we have data, the fraction of self-employed Americans with
paid workers has gone down by nearly a third.
As I mentioned in the first chapter, there are two main types of
self-employment, unincorporated and incorporated. The BLS data
Figure 14.8. Percentage of the Self-Employed with Employees

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shown in figure 14.8 are for unincorporated self-employment and

may not be the best measure of “entrepreneurship.” Many observers
think incorporated self-employment is more informative, since peo-
ple who go to the trouble of setting up a corporation are more likely
to run full-time businesses that employ others, rather than merely
being independent contractors.
But even the incorporated self-employed are far less likely to hire
other people than they were a generation ago. According to the BLS
data, the fraction of incorporated self-employed with employees has
fallen from 62.1 percent in 1995 to 42.1 percent in 2015. It is as if every
third incorporated self-employed person in 1995 got rid of his or her
workers by 2015. Where did these workers go?
America’s entrepreneurs have, in part, become more efficient,
decreasing the amount they spend on labor to produce each dollar
of revenue. Over the past three decades, technological advances have
permitted entrepreneurs to run their businesses with fewer employ-
ees. In the late 1970s and early 1980s, before small business owners
had personal computers, recordkeeping didn’t mean using Quick-
Books, it meant paper ledgers. Running a business was more labor
intensive; fewer small business owners could get by with zero em-
ployees, and those that had workers needed more of them. Personal
computers, software, smart phones, and the Internet have changed
how entrepreneurs operate. More of them can do things on their
own, or they can use contractors who don’t appear on their payrolls.
Long-term trends in sole proprietors’ spending on labor give in-
direct evidence of increased labor efficiency. The IRS data show that
they have dramatically cut what they spend on wages and salaries in
inflation-adjusted terms over the past three-plus decades. In 2013, the
average sole proprietor spent just over half as much on salaries and
wages as her counterpart did in 1975. Moreover, this decline is not
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the result of a shift from fixed wages to more variable compensation.

The amount the average sole proprietor pays in commissions has
fallen by nearly half since 1992.
It is also possible that sole proprietors’ labor bills are going down
because they are spending less on labor to generate a given amount of
revenue. One way to get at whether small business owners are econo-
mizing more on labor, is to look at what has happened to their labor
expenditures relative to sales. Their spending on labor as a fraction
of annual revenues bounced around between 1975 and 1997, yet over
the entire span since 1975 it has declined by nearly one-fourth—
from 3.2 percent in 1975 to 2.4 percent in 2013 (figure 14.9). Even
while the cost of labor increased dramatically because of rising ben-
efits costs, sole proprietorships cut the amount they spent to generate
each dollar of revenue.
Entrepreneurs also have turned to the use of contractors in-
stead of workers on their payrolls. Independent contractors provide
Figure 14.9. Labor as a Percentage of Sales at Proprietorships

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Figure 14.10. Contract Labor as a Percentage of Labor Expense

a way to accomplish work goals without direct hiring. Because en-

trepreneurs do not generally pay contractors’ benefits, the shift to
contractors helps to offset the rise in benefits costs while still allowing
entrepreneurs to use the labor they need to operate their businesses.
While the data on use of contract labor have a more limited scope
and a shorter time horizon than some of the statistics described ear-
lier, they suggest that entrepreneurs have been using more contract
labor in recent years. Even over the brief period from 2003 to 2013,
there was a large increase in the proportion of sole proprietors’ labor
expense that was used for contract labor: it rose from 20.1 percent to
It’s the Cost of Workers, Not Access to Talent

Many observers conflate the cost of employees and access to tal-
ent, arguing that entrepreneurs are less likely to start employer firms
because many new and small businesses cannot get the workers they
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need. As John Dearie and Courtney Geduldig put it in their book

Where the Jobs Are, “The most serious obstacle to additional hiring by
new businesses is a pronounced shortage of qualified talent.” 4 Dearie
told a subcommittee of the House Committee on Small Business that
“the skilled talent shortage . . . hits new businesses especially hard.
. . . The shoestring circumstances of most start-ups during the initial
years typically can’t accommodate the training programs necessary to
turn high-potential employees into high-value employees.”5
Dearie and Geduldig reported that entrepreneurs at roundtables
around the country said that this was the cause of the problem, but
the data suggest otherwise. A lack of talent cannot explain the decline
in the rate of employer firm formation. As several observers have
pointed out, the decline in employment by new businesses stems
almost completely from the decline in the number of new employers
rather than their size at startup, which has remained constant over
the past three decades. New businesses aren’t having troubling staff-
ing their operations at the size at which they typically operate. Yet
entrepreneurs are founding many fewer new businesses with paid
workers.
Moreover, if finding talent is really a problem, then bigger and
more mature companies should also be experiencing it. But the data
show that these businesses have had little trouble finding talent over
the past three-plus decades. Employment growth at big businesses
has been substantial over the past several decades. Chain businesses
have been adding workers faster than new companies, as shown by
an analysis I conducted with colleagues at the Cleveland Fed. (I will
say more about the shift to chains in the next chapter.) If there is
a shortage of qualified talent, why doesn’t it affect larger and older
businesses too?
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Figure 14.11. Percentage of Small Businesses with

at Least One Hard-to-Fill Job Opening
Source: Created from data from the National Federation of Independent Business.
Furthermore, systematic surveys of business owners do not show

evidence that they are having difficulty finding qualified workers.
The National Federation of Independent Business has been survey-
ing its members about the ease (or not) of filling job openings since
1986. While the fraction of business owners each year reporting that
they have at least one hard-to-fill opening largely follows economic
conditions, it has not trended upward over time. In January 2015,
only 26 percent of small business owners reported trouble filling at
least one position, versus 31 percent in January 2001 (figure 14.11). If
a lack of training of potential employees was the reason why employ-
ment by entrepreneurs has declined over time, then we should see a
rising percentage of small business owners reporting jobs that they
are having difficulty filling.
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The more plausible explanation is cost. As the cost of labor has

risen, people starting new businesses have become less likely to hire
workers. They have used technology and contractors to reduce or
eliminate their payrolls. Those two changes have led to a decline
in employer business creation and a rise of businesses without
employees.
Opportunity Cost May Play a Role

Rising labor costs also slow the formation of employer busi-
nesses through another mechanism, rising opportunity costs. As
Rob Fairlie, an economist at the University of California at Santa
Cruz, explains, people who are contemplating starting a business are
strongly influenced by the financial returns of the alternatives. While
there are always some who will start companies regardless of how
good salaries are at existing employers, most people compare the two
options. When wages are rising, the opportunity cost of starting a
business—the salary one must give up to do it—increases. That, in
turn, reduces the motivation to start a new firm.6
As we saw earlier in this chapter, the total compensation of the
average worker has been rising in recent decades. Increased com-
pensation raises the opportunity cost of leaving a job and starting
a business, and it increases the earnings threshold that the average
founder of an employer business needs to achieve to justify starting
the new company.7
I do not emphasize this argument, however, because rising wages
should also increase the opportunity cost of starting a non-employer
business. And as you no doubt realize, the number of non-employer
businesses has been rising. Therefore, rising wages are more likely to
have led would-be entrepreneurs to start businesses without employ-
ees than to have refrained from starting businesses in general.
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1. Total compensation at private sector employers has risen

in real terms since the mid-1990s, largely because of rising
benefits costs.
2. America’s entrepreneurs have responded by cutting back
on benefits, such as the provision of employee health in-
surance.
3. They have also allowed wages to fall relative to those at
large employers since the mid-1980s.
4. They have reduced their employment; the self-employed are
less likely to have employees now than in the mid-1990s.
5. America’s entrepreneurs have taken advantage of technol-
ogy to use labor more efficiently, generating more revenues
per dollar of labor expense than they did in the 1980s.
6. They have also increased their use of contract labor.
Rising labor costs are at least partially responsible for the changes
in entrepreneurship we have seen in this country over the past three-
plus decades. Total compensation at private sector employers has
risen in real terms since the mid-1990s, largely because of rising ben-
efits costs. These increased costs have led America’s entrepreneurs
not just to cut back on benefits and allow wages to fall relative to
large employers but also to cut back on the use of labor. They are re-
sponding to these higher costs by using technology to become more
efficient and by making greater use of contract labor. As a result, the
creation of employer businesses has fallen while the creation of non-
employers has risen.
I want to make clear what the changes in labor costs could ex-
plain and not explain about patterns in American entrepreneurship.
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Rising labor costs could explain what we have seen since the mid-
1990s. Since that time, the rate of employer firm formation has de-
clined while other measures of entrepreneurship, like the fraction of
Americans who file self-employment taxes or report business activity
on their tax returns, have risen. A higher cost of labor could have en-
couraged many entrepreneurs to substitute technology or contractors
for payroll workers, or to do without help. But the higher cost of
employee compensation cannot account for the decline in employer
firm formation rates and the rise in other measures of entrepreneur-
ship between the mid-1980s and the mid-1990s.
Nevertheless, the increased cost of worker compensation, par-
ticularly the rise in health and retirement benefits, has influenced
several changes in American entrepreneurship. More entrepreneurs
are operating without others on the payroll, and fewer are founding
and managing businesses with paid workers. But this is not the sole
explanation for what’s going on.
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FIFTEEN
Chains Have Replaced
Independent Employers
We have one final explanation to explore. This account is more

plausible than those described in many of the previous chapters, and
it fits the data quite well. It is the rise of chain businesses.
Multi-unit chains, or companies that own more than one place
of business, have grown dramatically over the past three and a half
decades, helped by the rise in information and communications tech-
nology. As technology has made it easier to manage multiple busi-
ness locations, chain businesses have developed an advantage over
single-establishment businesses, so that these multi-establishment
businesses have increasingly displaced independent companies in
the marketplace. Some of this substitution has involved the replace-
ment of small independent companies by big national chains—the
Walmarts and Targets of the world. But the shift is not limited to
retail. It has occurred in every sector of the economy.
Moreover, most of the chains replacing the single-establishment
businesses aren’t giant companies. They are dry cleaners with three
locations pushing out single-location dry cleaners. Or they are chains
of six Mexican restaurants in one city’s suburbs substituting for six
independent restaurants. Because this shift isn’t from small to giant
companies, it’s hard to say that it is “endangering” entrepreneurship
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C H A I N S R E P L AC E D I N D E P E N D E N T E M P LOY E R S
in America. A lot of entrepreneurs are growing their businesses at

the expense of other entrepreneurs. The market may simply be re-
warding more talented entrepreneurs over less talented ones. That
might not be a situation that justifies government intervention in
the marketplace.
But before we spend too much time evaluating the pros and cons
of what has happened, let’s first see why the growth-of-chains hy-
pothesis fits the data.
The Growth of Chains

Chains are becoming a more dominant way for businesses to
meet the American population’s demand for goods and services.
Technological advancements have made it easier for a small number
of chains, rather than for a large number of independent businesses,
to provide these services. To understand why, we need to think about
the changes in the country’s geography over the past thirty-five years.
Since the late 1970s, America’s population has moved south and west,
and from center cities to suburbs and even exurbs in some locations.
As some metropolitan areas have grown, and rural areas have
become exurbs and even suburbs, businesses have needed to create
new establishments to meet the demand of people living and work-
ing in those new locations. After all, people need carpet cleaning and
air-conditioning repair, restaurants and dry cleaners, clothing and
hardware and furniture. So entrepreneurs have set up shop in the
new suburban and exurban locations.
But who are the entrepreneurs opening up in the new strip
malls? Since the late 1970s the Census Bureau has collected data that
help answer this question. It measures the number of new and exist-
ing business establishments with employees as well as the number
of new and existing firms with employees. By measuring both new
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establishments (places where business occurs) and firms (legal entities

that operate in the economy) the data allow us to compare them.
When we count the number of existing or new establishments we
are counting new business locations of existing companies, such as
a new McDonald’s, as well as new businesses, such as Dave’s Diner,
a new independent restaurant. It’s not difficult to imagine that the
number of establishments might rise, but the number of firms might
fall. That would happen if chains have more success than new inde-
pendents. If the chains are less likely to close down and more likely
to start up or grow, they will tend to replace the single-establishment
companies.
There is a trade-off between the growth of multi-unit establish-
ments and new employer business formation. The more multi-unit
establishments grow, the more mom-and-pop businesses have to
decline. Bob Litan, one of the economists who has looked at these
data, explains that the larger established businesses become, “the
fewer the startups that sprout.” As he said to Inc. magazine, “If you
are a city or state with a rising concentration” of chain stores, or
branches of existing businesses, “you see a faster decline in your
startup rate.”1
We can also look at the ratio of new businesses to new establish-
ments. If there has been a shift toward more chain activity, then the
ratio of new establishments to new employer businesses should rise
over time. For instance, if the exurbs of San Jose, California, grow
and a new place to get dry cleaning done is needed, that new dry
cleaner is increasingly likely to be part of an existing chain of dry
cleaners expanding to a new location. The numbers confirm this.
Overall, in the United States, the new firm share of new establish-
ments has fallen from 79.2 percent in 1977 to 72.4 percent in 2013.
In 1977, Americans created 1.26 new establishments for every new
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business formed. By 2013, the latest year data are available, they cre-
ated 1.33 new establishments for every new business.2
Another way to measure the shift to establishments is by com-
paring the size of the average firm to the size of the average estab-
lishment. If chains are becoming more dominant, then we should
see businesses growing relative to establishments, because a chain re-
quires more workers than a single-establishment business. People are
also needed to coordinate activities across locations.
The numbers are consistent with this story. In 1977 the aver-
age American company with employees had 19.3 workers. In 2013 it
had 23.2, a 20 percent increase. Back in 1977, the average American
establishment had 15.9 workers. In 2013, that had increased to 17.5, a
rise of only 10 percent (figure 15.1). This means that the ratio between
the size of the average business and the size of the average establish-
ment has gone up, indicating a movement toward more coordinated
multi-unit operations.
Figure 15.1. Firm and Establishment Size Compared

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Figure 15.2. Average Size of New Firms and All Employer Firms
A final measure of the shift from independent businesses to

chains is the change in the average size of new firms versus all em-
ployer firms. New firms tend to be just big enough to meet the de-
mands of serving customers at a single establishment, since most new
firms start with one location, whereas existing firms tend to be of the
size necessary for however many establishments they have. The aver-
age size of an employer firm has grown about 20 percent since 1977
because those businesses have increasingly been made up of more
establishments. But the average size of new employer firms has actu-
ally fallen, from 6.7 to 5.6, a decline of 20 percent (figure 15.2). This
means that existing businesses are increasing in size relative to new
ones. While all firms had 2.9 times as many workers as new firms had
in 1977, they now have 4.1 times as many. Compared to three decades
ago, more new businesses either become chains or else fade away.
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Why the Growth in Chains?

Over time, customer demand has been served increasingly by
chains rather than independent companies. Why? There could be a
number of reasons, but the most compelling is the development of
information and communications technologies.
To grasp those changes, I need to put you back in 1977, the year
of the twenty-five-hour blackout in New York City. That was also
the year the first Apple II computer went on sale and the Depart-
ment of Defense introduced the NAVSTAR global positioning sys-
tem. Small business owners didn’t have computers, cell phones, in-
ventory management software, QuickBooks, point-of-sale terminals,
or most of the information technologies we take for granted today.
A second location of a dry cleaner or restaurant or clothing store had
to be operated pretty much independently, without much more real-
time connection than a telephone. Compared to today, there was
little that technology could do to provide an advantage to a business
owner with more than one establishment.
But since 1977, the enormous developments in information and
communications technologies have transformed business in many
ways that give multi-establishment businesses an advantage over
those in just a single location. Moreover, their value is often greater
for larger operations than for smaller ones because these technologies
can enhance coordination and distribution across a wide range of
locations. But they also help chains of any size: because they have a
fixed cost component, they are cheaper to implement on a per loca-
tion basis if they are being used in multiple locations simultaneously.
The end result is that chains have been able to increase their effi-
ciency—and thus productivity—faster than single-location firms,
and they have been able to take an increasing share of the market.
Improvements in information technology also make it easier for
existing companies to move into new markets by allowing them to
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manage their employees more effectively. Existing companies are

getting better at providing incentives to their employees to exploit
opportunities for them. When employees have the resources and op-
portunity to help their employers exploit new markets, fewer feel the
need to strike out on their own.
Think about the example of a clothing store. In the 1980s the
development of personal computers and the operating systems to
run them made it possible to put inventory management software
in retail establishments. Although such software could have been de-
veloped using mainframe computers in earlier decades, its cost and
complexity meant that a regional chain with ten stores wouldn’t have
had it.
Now imagine what happens when someone starts selling inven-
tory management software that runs on a PC. If a ten-store chain
tries it out, the company becomes more efficient at all ten locations.
The same software makes a single-location store more efficient too,
but in only that one location. The software costs the same to produce
whether it is bought for one location or ten, so the relative benefit of
the innovation is greater for the chain.
Now multiply this change across businesses in many industries
with many new pieces of technology and you see a pattern emerge.
The development of computer and communication technologies
benefited chains more than independent businesses. As a result, we
see a rising share of multi-unit establishments and a declining share
of independent businesses.
Not Growth in Mergers and Acquisitions

Of course, there are other broad explanations for this trend, some
of which are popular in the media. They sound plausible, but I don’t
think they fit the data as well. One common explanation is the acqui-
sition of small companies by big ones. According to this story, private
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equity companies like Mitt Romney’s Bain Capital have transformed

the American economy by buying up small independent companies
to create giant chains.
This story is not very consistent with the data. First of all, big
companies like Apple, IBM, and Procter and Gamble don’t actually
buy many startups, relative to the four to five hundred thousand cre-
ated every year. The little companies acquired by big public compa-
nies number in the low thousands, at most. You can see this pattern
intuitively by looking around your neighborhood. A national chain
has not bought your dry cleaner. Nor the diner you frequent or your
shoe repair shop. If an independent business in your neighborhood
was displaced, it was most likely by a small- or medium-size chain
from the next town over.
Moreover, mergers and acquisitions are how entrepreneurs often
generate financial returns from their efforts. Even if acquisitions by
big companies were to rise, there is no reason to think that would
reduce the rate at which people would start new employers. In fact, it
would most likely motivate them to start more of these businesses.
For the most part, the shift to chains has occurred largely among
small operators, not growing from one to one thousand outlets but
from one outlet to three. Moreover, the growth has occurred largely
because the chains have expanded to new locations, not because com-
panies have sought to roll up those independent businesses into a
single company.
Not Due to a Shift in Industrial Composition

Another alternative explanation is that the industrial composition
of the U.S. economy has changed, reducing the incentive for entre-
preneurs to found companies. This explanation isn’t very promising
for two reasons. The first is the direction of the change in industrial
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composition: manufacturing has declined and the service industry

has grown. In 1977, manufacturers made up 7.6 percent of employ-
ers, but by 2013 they comprised just 4.6 percent. By contrast, in 1977
service companies made up 32.7 percent of employers, but in 2013
they were 47.1 percent.3 Because manufacturing companies are more
difficult and costly to start than service businesses, if industrial com-
position were the primary factor in the formation of new employers,
the rate of formation should have gone up as relatively easy-to-start
service businesses became a more dominant part of the economy.
Moreover, the power of the decline in employer formation, and
the reason we see it in the aggregate data, is that it is generic. It has
taken place across all industries. This was not something that just af-
fected food establishments or dry cleaners or pharmacies. It affected
everyone who has the opportunity to have more than one place of
business.
That makes it difficult to buy the industrial composition story. If
the shift were concentrated in some industries that were particularly
hard hit by economic downturns (like construction) or were more
common in industries with greater ease of starting (like personal ser-
vices), then the explanation would be more plausible. But the shift
to chains is widespread, affecting all sectors of the economy. That
pattern requires a story that applies not just to some industries grow-
ing at the expense of others but that fits what we see throughout the
economy.
Is the Change a Problem?

Many policy makers have jumped from observing the decline
in the formation of new employer firms to recommending policies
to combat this trend. Thus far I have focused on understanding the
cause of the change, on the assumption that the answer needs to
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fit the problem. If the rise of chains is behind the decline in new

employer firms, “startup visas” are a non sequitur. The proportion
of immigrants in the population is not related to the rise in chains,
since immigrants are no more or less likely than the native born to
form chain businesses. Similarly, cutting taxes or reducing regula-
tions isn’t the cure. There is no reason to believe that tax or regula-
tory policy favors the formation of chains.
But there is another problem with calling for policies to stop the
decline, if the decline is caused by growth in chain businesses. All
policies have consequences, both intended and unintended. Some
downsides can’t be predicted in advance. If we adopt policies that
address a problem that isn’t there, we will do little to improve the
situation, but the downsides will happen anyway.
It will be hard to boost the rate of new employer firm formation.
Chains are growing at the expense of independent startups because
they make more efficient use of information and communications
technology. Taxing chains or subsidizing independent startups will
distort the efficient allocation of resources by putting them to a less
productive use. That is not wise policy. Society is worse off if we al-
locate resources away from their best and most productive uses.
Some might argue that we do need to intervene in the market-
place, even if we risk a misallocation of resources, to protect disad-
vantaged groups. We should stop the Walmarts of the world, many
say, from driving all the independent small business owners under.
But most of the growth in chains that is taking market share from
the independent business owners isn’t coming from the Walmarts or
Targets, it’s coming from local or regional three- and four-outlet busi-
nesses. It is small business competing against small business. So for-
get the economic justification. What is the political justification for
making it easier for a new entrepreneur to start a single-establishment
business at the expense of a three- or four-establishment chain?
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1. The ratio of new establishments to new firms has grown

since 1977.
2. Firm size has grown relative to establishment size.
3. The average size of employer businesses has grown since
the late 1970s, but the average size of new employers has
remained about the same.
4. Technological changes in information and communication
technology are a more likely explanation for the substitu-
tion of independent businesses by multi-unit companies
than changes in industrial composition or large chains
buying up independent single-location businesses.
One reason why the rate of employer firm formation has de-
clined and the economy has shifted toward a greater fraction of non-
employers has been the rise of chain businesses. Advances in informa-
tion and communication technology have made it easier to manage
multiple, dispersed business locations. This has given chains an advan-
tage over independent, single-establishment businesses. Multi-unit
businesses have grown faster in number and size than single-location
businesses and have displaced the single-establishment owners in
many markets. Because the growth of chains comes from more pro-
ductive use of resources, government intervention to prop up single-
location employers would be economically unwise, even if it was
politically appealing.
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SIXTEEN
The Story the Data Are Telling
Entrepreneurship seems to be in the very fiber of our culture.

Since our nation’s inception, entrepreneurs have played an important
role in the development of new technology, the generation of wealth,
and the creation of jobs.
The importance of entrepreneurship to America means that
those in Washington take very seriously any indication that our per-
formance at it is flagging. The implications of a decline are enor-
mous. With fewer entrepreneurs, our economy would be less flexible
and less responsive to changes. New technology would spread more
slowly. Labor markets would adapt less well to recessions and recover
more slowly during expansions. And many observers would want
policy makers to adopt policies to stimulate entrepreneurial activity.
It is no surprise, then, that economists and journalists, noting
the recent slowdown in employer firm formation, have called for a
policy response. They are urging our elected officials to start issuing
startup visas, boost entrepreneurial education, fix the tax code, subsi-
dize credit, change our culture, and cut regulation, among a myriad
of other things.
But should they? Every policy action has unforeseen conse-
quences. Undertaking a policy is only worthwhile if the problem is
severe enough to risk an unexpected outcome. If entrepreneurship
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T H E S T O R Y T H E D ATA A R E T E L L I N G
is not really in decline, then we shouldn’t incur the negative costs of

policy actions to boost it.
Moreover, to be effective, an intervention has to be designed
with attention to the actual nature of the problem. If entrepreneur-
ship rates are down because entrepreneurs are deterred by too much
regulation and not by lack of access to capital, then interventions to
stem regulation are a better answer than boosting credit to startups.
To know which “solutions” might have merit, economists and pol-
icy makers need to identify the causes of changes in entrepreneurial
activity.
What’s Really Happened?

Are entrepreneurs really endangered? I have spent fifteen chap-
ters answering that question. If you have read this far, you know that
they are not. We are not witnessing the disappearance of entrepre-
neurship in this country. Instead, we are seeing it change.
There are some negative indicators. The rate of unincorporated
self-employment has trended downward since the mid-1970s, and
the rate of secondary self-employment has fallen since 1999. The per-
centage of job seekers in outplacement who say they want to start
their own businesses has declined since 1989. And, of course, the
rate of creation of employer businesses has fallen by half since 1977,
bringing the level of formation below the replacement rate. The re-
sult has been a fall in employment at young companies, which weak-
ens future job creation and quite possibly hinders innovation, capital
investment, and productivity and GDP growth.
If these were the only indicators of entrepreneurship, we would
conclude that it is indeed in decline and that policy intervention makes
sense. But that is not the case. The rate of creation of many kinds of
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businesses is up and the failure rate of existing employers is down.

Entrepreneurs’ earnings have risen substantially in inflation-adjusted
terms, and high-potential companies are doing better than they were
in the 1980s. What has happened in American entrepreneurship over
the past three decades is something other than a simple decline. De-
signing a policy response is far more complex than what most pun-
dits are calling for.
The first step in figuring out what to do is to figure out what has
already happened. We can readily explain some shifts. The decline
in unincorporated self-employment, both on a primary and second-
ary basis, represents a straightforward shift in the legal form of self-
employment. The rate of incorporated self-employment has trended
upward since the late 1990s. If we combine the downward trend in
unincorporated self-employment with the upward trend in incorpo-
rated self-employment, we get a flat rate over time. The most likely
explanation for these offsetting trends is that the self-employed have
found reason to incorporate. Perhaps the cost of incorporation has
come down, or people are more concerned about liability. Whatever
it is, this pattern has nothing to do with the overall condition of en-
trepreneurship and everything to do with a switch in legal form.
We cannot dismiss other patterns as easily. The biggest issue is
the divergence in trends for new employer businesses and other types
of companies. As you know by now, the rate at which America is
creating employer businesses is half what it was in 1977. But you also
know that the per capita number of businesses without employees
has risen substantially; that a rising fraction of Americans are taking
the self-employment tax deduction on their individual taxes; that the
fraction of individual tax returns with business income or loss has
risen; and that the per capita numbers of sole proprietorships, part-
nerships, and corporations are all higher now than in 1980.
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Reconciling these trends suggests a very different explanation

from “entrepreneurship is in decline.” The numbers point to a story
about labor markets. America’s entrepreneurs appear to have shifted
away from hiring employees to running businesses without workers
or with off-payroll labor.
Total compensation at private sector employers has risen in real
terms since the mid-1990s. Wages have remained stagnant while ben-
efits have rapidly increased. Small business owners are feeling the
pinch of rising health care costs, and fewer of them provide employee
health insurance now than in the late 1990s. It is reasonable to sup-
pose that rising labor costs are an important reason fewer small busi-
nesses are taking on employees. They have shaved their hiring and
increased their use of contract workers.
There is also an issue in attracting labor. Small businesses have
become less attractive places to work. The wages they offer have
fallen relative to those at large employers since the mid-1980s. In-
ability to attract workers with high wages is no doubt another reason
small business owners are using fewer workers. Sole proprietors have
become more efficient users of labor, generating more revenues per
dollar of labor expense than they did in the 1980s. Whether this is
a problem remains to be considered. Responding to it, however, re-
quires thinking hard about whether to intervene in markets to moti-
vate America’s entrepreneurs to employ more people.
Other data show another trend. Despite the 50 percent de-
cline in the per capita rate of formation of new businesses with em-
ployees, the per capita stock of employers was higher in 2013 than
it was in 1977. This means the outflow of employers is down. As
employer firm formation rates have fallen over past decades, so
have failure rates. Perhaps the decline in employer firm formation
rates is occurring because existing employer firms are doing better.
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If existing employers are sticking around longer, there will be less

need—and less opportunity—for new employers.
Add to that the fact that many existing companies are expand-
ing their geographic reach by forming chains, and we have a very
different story. Advancements in information and communications
technologies over the past three-plus decades have made it easier to
manage multiple, geographically dispersed business locations. As
a result, chain businesses— companies with more than one estab-
lishment —have developed an advantage over single-establishment
businesses. The result is a displacement of independent, single-
establishment businesses by chains. This is why we observe a rising
ratio of new establishments to new firms since the late 1970s.
Entrepreneurship has not declined, but it has changed. Entre-
preneurs are getting better at running their companies. It may be
harder to break in, but once you do, your odds of success are better.
Should policy makers intervene because existing entrepreneurs
are making more money and failing at a lower rate? The question an-
swers itself. Creating lots of new companies that start and fail is not
a worthwhile policy goal. If entrepreneurs are becoming more profit-
able, less likely to fail, and more likely to expand their operations to
new locations, we should be happy. Creating more new employers
for the sake of having more new employers would be foolhardy.
Concerning high-potential businesses, some observers don’t
think that what has happened to typical companies matters much.
To them, entrepreneurship is about the new business superstars—
the next generation of Facebooks, Apples, Googles, and Snapchats. If
those are producing profits and generating jobs, then all is well.
The data show that we have little to worry about with high-
potential companies. Our venture capital and angel finance system
remains the envy of the world. The number of venture capital funds
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and the amount of venture capital under management are all higher
now than in the early 1980s. More startups are getting angel and ven-
ture finance than received those types of financing a decade or two
or three ago. Venture capital-backed companies account for a larger
fraction of employer firms now than in the early 2000s. And the
outcomes of those businesses are better than they were in the mid-
1980s, with a higher fraction of companies having positive exits and
with exits valued more in real terms. The valuations of early-stage
companies have risen substantially since the early 2000s.
The Flawed Explanations

Policy makers, economists, and journalists have offered numer-
ous explanations for the changes we have seen in entrepreneurship.
Many of them, however, have looked at relatively little of the data
and have used the decline in the rate of new employer firm formation
to advocate for a particular policy intervention. A careful look at the
data shows that most of these policies would do little because the fac-
tor they would address is not the cause of the supposed decline.
Consider easier access to credit for new and small businesses.
There is little evidence that a lack of access to capital is holding
Americans back from starting companies. Most of the money that
entrepreneurs use to finance their startups comes from their own
savings, and the personal savings rate is uncorrelated with the rate of
formation of employer businesses. Although fewer banks are lend-
ing to small businesses than did so in the 1980s, this shift does not
appear to have limited small business access to credit. More small
business loans are made now than in the 1990s, and small businesses
are more highly leveraged now, even after significant post-financial
crisis deleveraging. Moreover, many measures of entrepreneurship
have shown increases in recent years.
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Another common explanation for the “decline in entrepreneur-

ship” is high taxes. The data suggest that this is not a plausible ex-
planation. People rarely focus on tax rates when deciding whether
to start a new business. Theoretically, higher taxes both encourage
and discourage business formation, yielding no net effect. Empiri-
cally, the marginal income tax rate has actually gone down over the
past three decades, making it difficult to see income tax rates as an
obstacle to employer firm formation. Finally, high-tax states have
not seen greater declines in employer firm formation rates than low-
tax states.
Many observers point to regulation as a cause of the reduction
in entrepreneurship. But the causal relationship between regulation
and rates of entrepreneurship simply isn’t there. The rise in regula-
tion over the past three decades correlates positively with an increase
in the creation of non-employer businesses and with IRS measures of
small and new businesses. Owning a business has become more prof-
itable, not less, as regulation has increased, undermining the argu-
ment that regulation is having a dampening effect. Periods of major
regulatory increases have not been followed by declines in employer
firm formation, nor do small business owners perceive that regula-
tion is becoming onerous at times when employer firm formation
has declined. Finally, the negative correlation between rates of em-
ployer business formation and the number of rules pages found in
some casual investigations disappears when more rigorous statistical
tests are used.
Many observers have called for increased immigration to coun-
teract the decline in entrepreneurship. The data challenge this argu-
ment too. Only the creation of employer businesses is in decline, not
all entrepreneurship, and there is no reason to think that immigrants
are disproportionately likely to start companies with employees
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rather than businesses without them. It is difficult to see how a lack

of immigration has led simultaneously to a decline in employer firm
creation and a rise in non-employer form formation.
In any case, there is no evidence that recent federal government
policies (at least before 2017) have reduced immigration. It is difficult
to see how the government has deterred entrepreneurs from coming
into this country.
Moreover, the data challenge the notion that immigrants are
more likely to start businesses than native-born Americans. There is
no difference between the two groups in the probability of starting a
company. Thus, it is not clear how more immigration would gener-
ate more entrepreneurship.
Some observers have claimed that rates of entrepreneurship are
down because of a change in attitudes away from risk taking and will-
ingness to pursue opportunities. The data, however, do not conform
to this story. Overall rates of entrepreneurship are not down, only
the formation of employer businesses. Non-employer startups have
risen. It is not clear how a turn away from risk taking would cause
some measures of entrepreneurship to rise and others to fall. Surveys
show that Americans’ interest in entrepreneurship has changed little
over time. And the ways that it has changed are not consistent with
the decline in employer firm formation.
Student debt is another target of blame for the decline in entre-
preneurship, and it has led many to call on policy makers to inter-
vene. But both theory and evidence contradict this argument. On
the conceptual side, student debt should correlate with a rise in busi-
ness formation, given the reason the students incurred the debt in
the first place: to get a college education, which makes them more
likely to become entrepreneurs. On the empirical side, student debt
levels correlate positively with several measures of entrepreneurial
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activity since 1980, and periods of increase in student debt levels are
not followed by declines in employer firm formation. Finally, there is
no evidence that rising student debt has made Americans more risk
averse, or that risk aversion has led to a decline in entrepreneurial
activity.
Some economists have argued that slower population growth is
to blame. That argument doesn’t work either, because it requires the
profitability of entrepreneurship to have gone down. But running a
business is much more profitable now than it was three decades ago.
Moreover, there is very little correlation between the employer firm
formation rate and the labor force participation rate over the past
thirty-six years. The ratio of firm formation to the number of people
employed has decreased by more than the employer firm formation
rate, suggesting that population growth is not the key force behind
the decline. And changes in the population growth rate can’t account
for a simultaneous decline in the employer firm formation rate and a
rise in the non-employer formation rate.
A final explanation is aging of the population. Risk taking, cre-
ativity, and innovation all decline as people age, and some say that
the collective loss of these qualities is affecting rates of entrepreneur-
ship. Once again, however, the data disagree. There is little correla-
tion between the aging of the population and the rate of employer
firm formation. Moreover, several measures of entrepreneurship,
particularly those focused on non-employer businesses, have risen at
the same time that employer firm formation has declined. Absent a
theory for why an aging population should shift from employer to
non-employer firm formation, the association between population
age and entrepreneurship rates would seem to be spurious.
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Things Are Not All Good

I do not want to create the impression that I think all of these
changes are good. We need not worry about earnings from entre-
preneurial activity rising over time, or the fact that high-potential
businesses are doing well. A reduced failure rate of businesses might
be beneficial on average, shifting entrepreneurial success from newer
efforts to more mature ones. Even the growth of chains is ambigu-
ous. More concentrated success in the hands of entrepreneurs who
have built multi-unit businesses at the expense of single establish-
ment operations might not be a bad thing.
The worrisome trend in recent decades has been the shift in entre-
preneurial activity from employers to non-employers. To understand
why this is a problem, you need to recognize that the two are not
interchangeable. Changing between employers and non-employers
is not like choosing steak or shrimp for dinner. Non-employers are
much smaller companies than employers and have far less economic
impact. Switching from employers to non-employers is more like
giving up steak for a peanut butter sandwich. A little more peanut
butter doesn’t make up for less steak.
To see the magnitude of the difference, take a look at sales. In
2012, the latest year for which data are available, Census Bureau fig-
ures show that the average small employer in the United States had
revenues of $2,070,000, and the average non-employer had sales of
$45,000.1 That’s a ratio of 46:1. The formation of non-employers
would have to be astronomically high to make up for decline in the
formation of employers.
Then there’s the long-term trend. Non-employer revenue growth,
as small as it is, has actually been going down—by more than 24 per-
cent in real terms since 1998. Measured in constant year dollars, the
average sales at a non-employer business declined from $53,165 to
$44,437 over the period.2
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Moreover, the shift to non-employer businesses appears to have

negatively affected the economy (see chapter 5). Of all the major
problems that the growth of non-employer business formation and
the decline of employer business creation have caused, the biggest
one is the adverse effect on employment. New businesses are a key
source of job creation, and, by definition, non-employers are not
contributors to employment at all. As entrepreneurs create fewer new
employers, they are creating fewer jobs. The shift from employers
to non-employers has created a drag on small business employment
and might explain why employment growth at small companies has
lagged behind that of large companies over the past two decades.
The shift toward greater numbers of non-employer businesses in
the economy also might have caused a decline in capital investment
because employers spend so much more on equipment and struc-
tures than non-employers. The shift to non-employers could account
for the slowdown in innovation we have been seeing in small busi-
nesses in recent years since people are the ones who come up with
the new ideas. A decline in the rate of creation of employer businesses
might be responsible for growing income inequality because busi-
ness formation only helps people get ahead if they are creating sub-
stantial enough companies to earn a higher income than they would
get working for someone else. Finally, the replacement of employers
with non-employers may be behind slowing GDP and productivity
growth because employer businesses contribute far more to these two
dimensions of the economy than non-employers.
Where to Concentrate Our Efforts

Many of those observing and analyzing entrepreneurship in
America have followed the wrong path. In their quest to justify pol-
icy positions, they have sought simple answers to complex situations
226
Y7322.indb 226 1/17/18 10:56:55 AM

and argued incorrectly that the decline in the formation of employer

businesses means a fall in entrepreneurship. They have then sought
to link, without real evidence, that “decline in entrepreneurship”
with the absence of the policies they favor.
The more nuanced story is that entrepreneurship has changed.
Some of the changes are benign, but others, like the shift to more
businesses without employees, are more ominous. Policy makers,
economists, and journalists should focus their attention on the real
transformation: the decline in job creation by new and young firms.
Americans are not creating companies with employees as they once
did, and job creation by young and small businesses has suffered.
We don’t yet know all the reasons for this shift. It would there-
fore be premature for me to offer a set of policy solutions. I have no
wish to make my own contribution to the long list of wrong answers
outlined in this book.
But we do know where to start to look for answers. As we saw
in chapter 14, the rising cost of employee benefits correlates with the
shift to non-employer business creation. Labor markets are a good
place to focus attention. They seem to offer the best explanation for
the divergence between employer and non-employer businesses—
something that cannot be accounted for by taxes or regulation or
access to capital.
Some will argue that the passage of the Affordable Care Act
solved this problem. But the data show that the health care law did
not stem the decline in employer firm formation or the rise in non-
employers. Moreover, we need to rule out alternative explanations
for the shift to non-employers. The use of contract labor has risen
over the past decade. Investigators need to remove the part of the
effect that comes from shifts like these and hone in on the part that
comes from the rise in benefits costs.
227
Y7322.indb 227 1/17/18 10:56:55 AM

Last Word
Many people are asking whether entrepreneurship is in danger.
The answer is clearly “no.” But that may be the wrong question. If we
ask whether we have a problem creating new employers, the answer
is much closer to “yes.”
228
Y7322.indb 228 1/17/18 10:56:55 AM

Notes
Introduction
1. K. Bahsin, “Malcolm Gladwell on Why History Will Remember Bill Gates
and Forget Steve Jobs,” Business Insider, June 7, 2012, http://www.businessinsider
.com/malcolm-gladwell-on-how-we-worship-entrepreneurs-2012 – 6.
2. A. de Tocqueville, Selected Letters on Politics and Society, ed. R. Boesche, Berke-
ley: University of California Press, 1985.
3. R. Decker, J. Haltiwanger, R. Jarmin, and J. Miranda, “The Secular Decline
in Business Dynamism in the United States,” Working Paper, 2010, University of
Maryland, http://econweb.umd.edu/~haltiwan/DHJM_JEP_5_17_2013.pdf.
4. J. Yellen, “Perspectives on Inequality and Opportunity from the Survey of
Consumer Finances,” October 17, 2014, https://www.federalreserve.gov/news
events/speech/yellen20141017a.htm.
5. J. Plehn-Dujowich, “Product Innovation by Young and Small Firms,” report
for the Office of Advocacy of the U.S. Small Business Administration, May 2013,
under contract SBAHQ-11-M-0204, https://www.sba.gov/sites/default/files/files/
rs408tot.pdf.
6. I. Hathaway and R. Litan. “Declining Business Dynamism in the United
States: A Look at States and Metros,” Economic Studies at Brookings, May 2014,
http://www.brookings.edu /~/media /research /files /papers /2014/05/declining%20
business%20dynamism%20litan /declining_business_dynamism_hathaway_litan
.pdf.
7. D. Burton. “Building an Opportunity Economy: The State of Small Busi-
ness and Entrepreneurship,” Testimony before the Committee on Small Business,
U.S. House of Representatives, March 5, 2015, http://www.heritage.org/research/
testimony/2015/ building-an-opportunity-economy-the-state-of-small-business
-and-entrepreneurship.
229
Y7322.indb 229 1/17/18 10:56:55 AM

N OT E S TO PAG E S 1 7 – 2 6
Chapter 1. Something Is Happening,

but We Don’t Know What It Is
1. B. Casselman, “The Slow Death of American Entrepreneurship,” Fivethirty-
eight, May 15, 2014, http://fivethirtyeight.com/features/the-slow-death-of-american
-entrepreneurship/.
2. Jim Clifton, “American Entrepreneurship: Dead or Alive?” Business Journal,
January 13, 2015, http://www.gallup.com/businessjournal /180431/american-entre
preneurship-dead-alive.aspx.
3. J. D. Harrison, “The Decline of American Entrepreneurship in Five Charts,”
Washington Post, February 12, 2015, https://www.washingtonpost.com/news/on
-small-business /wp/2015/02/12/the-decline-of-american-entrepreneurship-in-five
-charts/.
4. Dane Stangler, “The Looming Entrepreneurial Boom: How Policy Makers
Can Renew Entrepreneurial Growth,” n.d., http://www.kauffman.org/neg/neg
-intro#theloomingentrepreneurialboomhowpolicymakerscanrenewstartupgrowth.
5. Annie Lowrey, “Don’t Let the Disruption Hype Fool You: America Is Actually
Getting Less Entrepreneurial,” New York, August 5, 2014, http://nymag.com/daily/
intelligencer/2014/08/america-is-getting-less-entrepreneurial.html.
6. Ibid.
7. Pew Research Center, “Three-in-Ten Jobs Are Held by the Self-Employed
and the Workers They Hire,” October 22, 2015, http://www.pewsocialtrends
.org /2015/10/22/three-in-ten-u-s-jobs-are-held-by-the-self-employed-and-the
-workers-they-hire/.
8. R. Decker, J. Haltiwanger, R. Jarmin, and J. Miranda, “The Role of Entre-
preneurship in U.S. Job Creation and Economic Dynamism,” Journal of Economic
Perspectives 28, no. 3 (20014): 3 –24.
9. I. Hathaway and R. Litan, “What’s Driving the Decline in the Firm Forma-
tion Rate? A Partial Explanation,” Economic Studies at Brookings, November 2014,
https://www.brookings.edu /wp-content /uploads /2016/06/driving_decline_firm_
formation_rate_hathaway_litan.pdf; I. Hathaway and R. Litan, “Declining Business
Dynamism in the United States: A Look at States and Metros,” Economic Studies
at Brookings, May 2014, https://www.brookings.edu/wp-content/uploads/2016/06/
declining_business_dynamism_hathaway_litan.pdf; I. Hathaway and R. Litan,
“The Other Aging of America: The Increasing Dominance of Older Firms,” Eco-
nomic Studies at Brookings, July 2014, https://www.brookings.edu/wp-content/up
loads/2016/06/other_aging_america_dominance_older_firms_hathaway_litan.pdf.
230
Y7322.indb 230 1/17/18 10:56:55 AM

Chapter 2. The Good News

1. I. Hathaway and R. Litan, “The Other Aging of America: The Increasing
Dominance of Older Firms. Economic Studies at Brookings, July 2014, http://www
.brookings.edu /~/media /research /files /papers /2014 /07/aging%20america%20
increasing%20dominance%20older%20firms%20litan /other_aging_america
_dominance_older_firms_hathaway_litan.pdf.
2. J. Dearie and C. Geduldig, Where the Jobs Are: Entrepreneurship and the Soul
of the American Economy, Hoboken, NJ: Wiley, 2013.
3. Author’s calculations from U.S. Census data, https://www.census.gov/ces/
dataproducts/bds/.
dataproducts/bds/.
5. A. Pe’er and I. Vertinsky, “Firm Exits as a Determinant of New Entry: Is There
Evidence of Local Creative Destruction?,” Journal of Business Venturing 23 (2008):
280 –306.
dataproducts/bds/.
7. Author’s calculations from the Survey of Consumer Finances data, https://
www.federalreserve.gov/econres/scfindex.htm.
Chapter 3. Entrepreneurial Earnings Are on the Rise

1. Author’s calculations from IRS data, https://www.irs.gov/uac/soi-tax-stats
-statistics-of-income).
Chapter 4. Riding High

1. R. Decker, J. Haltiwanger, R. Jarmin, and J. Miranda, “The Decline of High
Growth Entrepreneurship,” VOX, 2016, http://www.voxeu.org/article/decline-high
-growth-entrepreneurship.
2. Author’s calculations from National Venture Capital Association data, http://
nvca.org/.
nvca.org/, and U.S. Census data, https://www.census.gov/ces/dataproducts/bds/.
231
Y7322.indb 231 1/17/18 10:56:55 AM

5. Author’s calculations from Center for Venture Research data, https://paul

college.unh.edu/research/center-venture-research/cvr-analysis-reports, and U.S.
Census data, https://www.census.gov/ces/dataproducts/bds/.
nvca.org/.
nvca.org/.
nvca.org/.
10. Author’s calculations from Center for Venture Research data, https://paul
college.unh.edu/research/center-venture-research/cvr-analysis-reports.
11. M. Hudson, “Angel Investments in the U.S.—Helping Startups Be Suc-
cessful,” Angel Capital Association, 2016, https://www.angelcapitalassociation.org/
data/Documents/Resources/ACATaiwanSummitRev09-06-16.pdf.
nvca.org/.
13. Cambridge Associates, “U.S. Venture Capital Index and Selected Benchmark
Statistics,” 2014, http://www.cambridgeassociates.com/wp-content/uploads/2015/
05/ Public-USVC-Benchmark-2014-Q4.pdf.
14. National Venture Capital Association, http://nvca.org/.
15. Ibid.
nvca.org/.
nvca.org/.
18. Author’s calculations from Cooley Venture Financing Report data, https://
www.cooleygo.com/trends/.
Chapter 5. The Implications of Fewer Employer Startups

1. Author’s calculations from IRS data, https://www.irs.gov/uac/soi-tax-stats
-statistics-of-income, and U.S. Census data, https://www.census.gov/ces/data
products/ bds/.
Perspectives 28, no. 3 (2014): 3 –24.
232
Y7322.indb 232 1/17/18 10:56:55 AM

3. Ibid.
dataproducts/bds/.
5. Author’s calculations from Bureau of Labor Statistics data, https://www.bls
.gov/.
6. Decker, Haltiwanger, Jarmin, and Miranda, “Role of Entrepreneurship.”
7. Author’s calculations from Small Business Administration data, https://www
.sba.gov/category/advocacy-navigation-structure/research-and-statistics.
8. Author’s calculations from Small Business Administration data, https://www
.sba.gov/category/advocacy-navigation-structure/research-and-statistics.
dataproducts/bds/.
.gov/lpc/.
11. E. Prescott and L. Ohanian, “U.S. Productivity Growth Has Taken a Dive,”
Wall Street Journal, February 3, 2014, https://www.wsj.com/articles/the-key-to
-a-stronger-us-economy-higher-productivitythe-key-to-a-stronger-us-economy
-higher-productivity-1391469120.
12. U.S. Census “Nonemployer Statistics,” https://www.census.gov/econ/non
employer/.
13. Author’s calculations from U.S. Census data, https://www.census.gov/library/
publications/2017/econ/2017-csr.html.
14. Author’s calculations from NFIB Small Business Economic Trends data,
http://www.nfib.com/surveys/small-business-economic-trends/.
15. Author’s calculations from the Federal Reserve Flow of Funds Report data,
https://www.federalreserve.gov/releases/z1/current/, and IRS Statistics of Income
data, https://www.irs.gov/uac/soi-tax-stats-statistics-of-income.
16. Author’s calculations from U.S. Patent and Trademark Office data, https://
www.uspto.gov/learning-and-resources/statistics.
17. J. Lettieri, “America without Entrepreneurs: The Consequences of Dwin-
dling Startup Activity,” Testimony before the Committee on Small Business and
Entrepreneurship, U.S. Senate, June 29, 2016, https://www.sbc.senate.gov/public/_
cache /files /0/d /0d8d1a51-ee1d-4f83-b740-515e46e861dc /7F75741C1A2E6182E1A5D
21B61D278F3.lettieri-testimony.pdf.
18. J. Haltiwanger, “Job Creation and Firm Dynamics in the United States,” In-
novation Policy and the Economy 12:17–38, http://www.journals.uchicago.edu/doi/
pdfplus/10.1086/663154.
233
Y7322.indb 233 1/17/18 10:56:55 AM

N OT E S TO PAG E S 9 5 – 1 0 5
Chapter 6. It’s Not a Lack of Capital

1. B. Lynn and L. Khan, “The Slow Motion Collapse of American Entrepre-
neurship,” Washington Monthly, July/August 2012, http://www.washingtonmonthly
.com/magazine/julyaugust_2012/features/the_slowmotion_collapse_of_ame038414
.php?page=all.
2. B. Ryan, “Starved of Financing, New Businesses Are in Decline,” Busi-
ness Journal, September 4, 2014, http://www.gallup.com/businessjournal /175499/
starved-financing-new-businesses-decline.aspx.
3. Roisin McCord, Edward Simpson Prescott, and Tim Sablik, “Explaining the
Decline in the Number of Banks since the Great Recession,” Federal Reserve Bank
of Richmond Economic Brief, March 2015, https://www.richmondfed.org/-/media/
richmondfedorg/publications/research/economic_brief/2015/pdf/eb_15 – 03.pdf.
4. Lynn and Khan, “Slow Motion Collapse.”
5. J. Dearie, Testimony before the Subcommittee on Contracting and Work-
force, Committee on Small Business, U.S. House of Representatives, September
11, 2014, https://smallbusiness.house.gov/uploadedfiles/9-11-2014_dearie_testimony
.pdf.
6. Author’s calculations from FDIC data, https://www.fdic.gov/bank/
analytical /qbp/timeseries/SmallBusiness&FarmLoans.xls.
analytical /qbp/timeseries/SmallBusiness&FarmLoans.xls.
8. Author’s calculations from FDIC data, https://www.fdic.gov/bank/analytical /
qbp/timeseries/SmallBusiness&FarmLoans.xls, and IRS Statistics of Income data,
https://www.irs.gov/uac/soi-tax-stats-statistics-of-income.
analytical /qbp/timeseries/SmallBusiness&FarmLoans.xls, and U.S. Census data,
https://www.census.gov/programs-surveys/susb.html.
10. Author’s calculations from Federal Reserve data, https://www.federalreserve
.gov/Releases/Z1/Current/.
11. Federal Reserve Survey of Small Business Finance data, https://www.federal
reserve.gov/pubs/oss/oss3/nssbftoc.htm.
12. Author’s calculations from the Federal Reserve Flow of Funds Report data,
https://www.federalreserve.gov/releases/z1/current/.
234
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N OT E S TO PAG E S 1 0 8 – 1 1 0
Chapter 7. Don’t Blame the Regulators

1. T. Siems, “What Keeps Small Business Owners Up at Night?,” Financial In-
sights 3, no. 2 (2014), http://www.dallasfed.org/assets/documents/banking/firm/fi/
fi1402.pdf.
2. T. Kane, “Encouraging Entrepreneurship: Growing Business, Not Bureau-
cracy,” Testimony before the Joint Economic Committee, U.S. House of Repre-
sentatives, July 12, 2016, http://www.jec.senate.gov/public/_cache/files/eafbff88
-6997-49b7-abb6-e9352cb7dc6d/kane-testimony.pdf.
3. D. Burton, “Building an Opportunity Economy: The State of Small Busi-
ness and Entrepreneurship,” Testimony to the Committee on Small Business, U.S.
House of Representatives, March 4, 2015, http://smallbusiness.house.gov/uploaded
files/3-4-2015_final_burton_tesimony_final.pdf.
4. D. Greenblatt, “The Obama Administration’s Regulatory War on Jobs, the
Economy and America’s Global Competitiveness,” Testimony before the Subcom-
mittee on Regulatory Reform, Commercial and Antitrust Law of the Committee
on the Judiciary, U.S. House of Representatives, February 28, 2013, http://www
.nam.org /Issues /Regulatory-Reform /Regulatory-Challenges-to-Job-Growth-and
-Global-Competitiveness--Testimony-by-Drew-Greenblatt--President-and-Owner
-of-Marlin-Steel-Wire--on-Behalf-of-the-NAM/.
5. United States Small Business Friendliness Survey, https://www.thumbtack
.com/survey#/2016/1/states.
6. R. Litan, “Startup Slowdown,” Foreign Affairs, January–February 2015, http://
www.foreignaffairs.com/articles/142498/robert-litan/start-up-slowdown.
7. Ewing Marion Kauffman Foundation, “The Importance of Young Firms for
Economic Growth,” Entrepreneurship Policy Digest, September 25, 2014, http://
www.kauffman.org /~/media /kauffman_org /resources /2014/entrepreneurship%20
policy%20digest /september%202014/entrepreneurship_policy_digest_september
2014.pdf.
8. A. Kim, “Excessive Regulation Hurts America’s Entrepreneurs,” The Daily
Signal, May 13, 2015, http://dailysignal.com/2015/05/13/excessive-regulation-hurts
-americas-entrepreneurs/.
9. I. Wladawsky-Berger, “Entrepreneurship and Job Creation,” November 5,
2014, http://blog.irvingwb.com/blog/2014/11/entrepreneurship-and-the-soul-of-the
-american-economy.html.
10. W. Crews, “Ten Thousand Commandments,” Competitiveness Enterprise In-
stitute, 2014, http://cei.org/sites/default/files/ Wayne%20Crews%20-%20Ten%20
Thousand%20Commandments%202014.pdf.
235
Y7322.indb 235 1/17/18 10:56:55 AM

N OT E S TO PAG E S 1 1 0 – 1 2 1
11. National Small Business Association (NSBA), Small Business Regulations

Survey, 2017, http://www.nsba.biz/wp-content/uploads/2017/01/Regulatory-Survey
-2017.pdf.
12. Wladawsky-Berger, “Entrepreneurship and Job Creation.”
13. M. Kravis, “What’s Killing Jobs and Stalling the Economy,” Wall Street Jour-
nal, June 3, 2016, http://www.wsj.com/articles/whats-killing-jobs-and-stalling-the
-economy-1464992963.
14. W. Crain and N. Crain. The Cost of Federal Regulation to the U.S. Economy,
Manufacturing and Small Business, September 10, 2014, http://www.nam.org/Data
-and-Reports/Cost-of-Federal-Regulations/Federal-Regulation-Full-Study.pdf.
15. Ibid.
16. J. Ortmans, “The Decline in Business Formation: Implications for Entre-
preneurship and the Economy,” Testimony before the Subcommittee on Contract-
ing and Workforce, Committee on Small Business, U.S. House of Representatives,
September 11, 2014, https://www.gpo.gov/fdsys/pkg/CHRG-113hhrg89676/pdf/
CHRG-113hhrg89676.pdf.
17. “The Vanishing Entrepreneur, Crushed by Red Tape and Regulations,” Wash-
ington Times, 2014, http://www.washingtontimes.com/news/2014/may/9/editorial
-the-vanishing-entrepreneur/.
18. Crews, “Ten Thousand Commandments.”
19. N. Goldschlag and A. Tabarrok, “Is Entrepreneurship in Decline?,” Working
Paper, 2016, George Mason University, https://mason.gmu.edu/~atabarro/Is%20
Entrepreneurship%20in%20Decline.pdf.
20. Author’s calculations from NFIB Small Business Economic Trends data,
http://www.nfib.com/surveys/small-business-economic-trends/.
21. Kravis, “What’s Killing Jobs.”
22. Goldschlag and Tabarrok, “Is Entrepreneurship in Decline?”
23. Ibid.
Perspectives 28, no. 3 (2014): 3 –24.
25. Ibid.
26. Goldschlag and Tabarrok, “Is Entrepreneurship in Decline?”
27. B. Heim and I. Lurie, “Did Reform of the Non-Group Health Insurance
Market Affect the Decision to Be Self-Employed? Evidence from State Reforms in
the 1990s,” Health Economics 23 (2014): 841– 860.
236
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N OT E S TO PAG E S 1 2 3 – 1 2 8
Chapter 8. High Taxes Are Not the Cause

1. T. Kane, “The Collapse of Startups in Job Creation,” Economic Policy Brief-
ing Paper, Hudson Institute. September 2012, http://www.hudson.org/content/
researchattachments /attachment /1067/kane--thecollapseofstartupsinjobcreation
0912web.pdf.
2. J. Dearie, Testimony before the Subcommittee on Contracting and Workforce,
Committee on Small Business, U.S. House of Representatives, September 11, 2014,
https://smallbusiness.house.gov/uploadedfiles/9-11-2014_dearie_testimony.pdf.
3. A. Kim, “Economic Freedom: America’s Entrepreneurial Pulse at Risk,” The
Daily Signal, April 1, 2014, http://dailysignal.com//2014/04/01/economic-freedom
-americas-entrepreneurial-pulse-risk/.
4. Susan C. Nelson, “Tax Policy and Sole Proprietorships: A Closer Look,” Na-
tional Tax Journal 61 (2008): 421– 433.
5. D. Bruce and J. Deskins, “Can State Tax Policies Be Used to Promote Entre-
preneurial Activity?,” Small Business Economics 38, no. 4 (2012): 375 –397; D. Bruce
and M. Mohsin, “Tax Policy and Entrepreneurship: New Time Series Evidence,”
Small Business Economics 26 (2006): 409 – 425.
6. D. Bruce, J. Deskins, and M. Mohsin, “State Tax Policies and Entrepreneurial
Activity: A Panel Data Analysis,” National Tax Association Proceedings 96 (2003):
325 –335; J. Cullen and R. Gordon, “Taxes and Entrepreneurial Risk Taking: The-
ory and Evidence for the U.S.,” Journal of Public Economics 91, nos. 7/8 (2007):
1479 –1505; S. Parker and M. Robson, “Explaining International Variations in Self-
Employment: Evidence from a Panel of OECD Countries,” Southern Economic Jour-
nal 71 (2004): 287–301.
7. D. Bruce and T. Gurley, “Taxes and Entrepreneurial Entry: An Empirical
Investigation Using Longitudinal Tax Return Data,” Annual Conference on Taxa-
tion and Minutes of the Annual Meeting of the National Tax Association 97 (2004):
336 –343.
8. Bruce and Deskins, “Can State Tax Policies Be Used to Promote Entrepre-
neurial Activity?”
9. Parker and Robson, “Explaining International Variations in Self-Employ-
ment”; R. Torrini, “Cross-Country Differences in Self-Employment Rates: The Role
of Institutions,” Labor Economics 12, no. 5 (2005): 661– 683; D. Blau, “A Time-Series
Analysis of Self-Employment in the United States,” Journal of Political Economy 95,
no. 3 (1987): 445 – 467; W. Gentry and R. Hubbard, “Tax Policy and Entrepre-
neurial Entry,” American Economic Review Papers and Proceedings 90, no. 2 (2000):
237
Y7322.indb 237 1/17/18 10:56:56 AM

N OT E S TO PAG E S 1 2 8 – 1 3 5
283 –287; M. Robson and C. Wren, “Marginal and Average Tax Rates and the In-
centive for Self-Employment,” Southern Economic Journal 65, no. 4 (1999): 757–773;
Y. Georgellis and H. Wall, “Entrepreneurship and the Policy Environment,” Federal
Reserve Bank of St. Louis Review 88, no. 2 (2006): 95 –111.
10. J. Long, “The Income Tax and Self-Employment,” National Tax Journal 35,
no. 1 (1982): 31– 42.
11. Cullen and Gordon, “Taxes and Entrepreneurial Risk Taking.”
12. Bruce, Deskins, and Mohsin, “State Tax Policies and Entrepreneurial Activ-
ity”; Bruce and Mohsin, “Tax Policy and Entrepreneurship.”
13. M. Baliamoune-Lutz and P. Garello, “Tax Structure and Entrepreneurship,”
Small Business Economics 42, no. 1 (2014): 165 –190.
Perspectives 28, no. 3 (2014): 3 –24.
15. J. Pethokoukis, “Where Are All the Startups? A Q&A with Ian Hathaway on
the Decline of US Entrepreneurship,” AEI Ideas, October 8, 2014, https://www.aei
.org/publication/startups-qa-ian-hathaway-decline-us-entrepreneurship/.
Chapter 9. It’s Not a Lack of Immigration

1. Ewing Marion Kauffman Foundation, “The Economic Case for Welcom-
ing Immigrant Entrepreneurs,” Economic Policy Institute, March 27, 2015, http://
www.kauffman.org /what-we-do/resources /entrepreneurship-policy-digest /the
-economic-case-for-welcoming-immigrant-entrepreneurs.
2. I. Hathaway and R. Litan, “What’s Driving the Decline in the Firm Formation
Rate? A Partial Explanation,” Economic Studies at Brookings, November 2014, http://
www.brookings.edu /~/media /research /files /papers /2014/11/driving-decline -firm
-formation-rate-hathaway-litan /driving_decline_firm_formation_rate_hathaway
_litan.pdf.
3. R. Litan, “Startup Slowdown: How the United States Can Regain Its Entre-
preneurial Edge,” Foreign Affairs, January–February 2005, http://www.foreignaffairs
.com/articles/142498/robert-litan/start-up-slowdown.
4. Ibid.
5. J. Dearie, Testimony before the Subcommittee on Contracting and Workforce,
Committee on Small Business, U.S. House of Representatives, September 11, 2014,
http://smallbusiness.house.gov/uploadedfiles/9-11-2014_dearie_testimony.pdf.
238
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N OT E S TO PAG E S 1 3 5 – 1 47
6. J. Ortmans, “The Decline in Business Formation: Implications for Entre-

preneurship and the Economy,” Testimony before the Subcommittee on Contract-
ing and Workforce, Committee on Small Business, U.S. House of Representatives,
September 11, 2014, http://www.kauffman.org/~/media/kauffman_org/research%
20 reports%20and%20covers /2014/09/jonathan_ortmans_testimony_september
_2014.pdf.
7. Litan, “Startup Slowdown.”
8. A. Singer, “Contemporary Immigrant Gateways in Historical Perspective,”
Dædalus 142, no. 3 (2013): 76 –91.
9. Ortmans, “Decline in Business Formation.”
10. S. Camarota, “Immigrants in the United States: A Profile of America’s
Foreign-Born Population,” Center for Immigration Studies, 2012, p. 3, http://cis.org/
sites/cis.org/files/articles/2012/immigrants-in-the-united-states-2012.pdf.
11. R. Fairlie, “Immigrant Entrepreneurs and Small Business Owners, and Their
Access to Financial Capital,” report for the Office of Advocacy, U.S. Small Business
Administration, under contract no. SBAHQ-10-R-0009, May 2012, https://www
.sba.gov/sites/default/files/advocacy/rs396tot.pdf.
12. Ibid.
13. Camarota, “Immigrants in the United States.”
14. Ibid.
15. Author’s calculations from Startup Chile data, http://www.startupchile.org/,
and U.S. Census data, https://www.census.gov/ces/dataproducts/bds/.
16. Author’s calculations from U.S. Census data, https://www.census.gov/news
room/releases/archives/business_ownership/cb12-tps80.html.
Chapter 10. An Aging Population Isn’t the Reason

1. D. Kinkade, “Vanishing Act: The Decline of American Entrepreneurship,”
Above the Fold, June 2, 2014, https://www.uschamber.com/blog/vanishing-act
-decline-american-entrepreneurship.
2. J. Liang, J. Wang, and E. Lazear, “Demographics and Entrepreneurship,”
NBER Working Paper, No. 20506, 2014, http://www.nber.org/papers/w20506.
3. D. Stangler and J. Bell-Masterson, “Can Millennials Reverse America’s De-
clining Rates of Entrepreneurship?,” Washington Monthly, August 17, 2014, http://
washingtonmonthly.com /2014/08/17/can-millennials-reverse-americas-declining
-rates-of-entrepreneurship/.
239
Y7322.indb 239 1/17/18 10:56:56 AM

N OT E S TO PAG E S 1 4 8 – 1 5 4
4. Liang, Wang, and Lazear, “Demographics and Entrepreneurship.”

5. L. Buchanan, “American Entrepreneurship Is Actually Vanishing: Here’s
Why,” Inc., May 2015, http://www.inc.com/magazine/201505/leigh-buchanan/the
-vanishing-startups-in-decline.html.
6. B. Casselman, “The Slow Death of American Entrepreneurship,” Fivethirty-
eight, May 15, 2014, http://fivethirtyeight.com/features/the-slow-death-of-american
-entrepreneurship/.
www.brookings.edu /~/media /research /files /papers /2014/11/driving-decline-firm
-formation-rate-hathaway-litan /driving_decline_firm_formation_rate_hathaway_
litan.pdf.
8. Casselman, “Slow Death of American Entrepreneurship.”
9. Liang, Wang, and Lazear, “Demographics and Entrepreneurship.”
10. R. Simon and C. Barr, “Endangered Species: Young U.S. Entrepreneurs,”
Wall Street Journal, January 2, 2015, http://www.wsj.com/articles/endangered
-species-young-u-s-entrepreneurs-1420246116?autologin=y.
11. E. Reedy and A. Morelix, “Student Debt and the Millennial Entrepre-
neurship Paradox,” Forbes, September 15, 2014, http://www.forbes.com/sites/
kauffman /2014/09/15/student-debt-and-the-millennial-entrepreneurship-paradox /
#3bae1b7b2f70.
12. F. Karahan, B. Pugsley, and A. Sahin, “Understanding the 30-Year Decline in
the Startup Rate: A General Equilibrium Approach,” Federal Reserve Bank of New
York Working Paper, May 2015, http://www.hec.ca/iea/chaires_groupes_recherche/
macromontreal /conferences/20150602_Aysegul_Sahin.pdf.
Chapter 11. Slowing Population Growth Isn’t the Explanation

1. F. Karahan, B. Pugsley, and A. Sahin, “Understanding the 30-Year Decline in
the Startup Rate: A General Equilibrium Approach,” Federal Reserve Bank of New
York Working Paper, May 2015, http://www.hec.ca/iea/chaires_groupes_recherche/
macromontreal /conferences/20150602_Aysegul_Sahin.pdf.
2. J. Pethokoukis, “Where Are All the Startups? A Q&A with Ian Hathaway on
the Decline of US Entrepreneurship,” AEI Ideas, October 8, 2014, https://www.aei
.org/publication/startups-qa-ian-hathaway-decline-us-entrepreneurship/; L. Bu-
chanan, “American Entrepreneurship Is Actually Vanishing: Here’s Why,” Inc.,
240
Y7322.indb 240 1/17/18 10:56:56 AM

N OT E S TO PAG E S 1 5 5 – 1 6 4
May 2015, http://www.inc.com/magazine/201505/leigh-buchanan/the-vanishing

-startups-in-decline.html.
3. J. Hotchkiss, “Employment Growth and Labor Force Participation: How
Many Jobs Are Enough?,” Federal Reserve Bank of Atlanta, Economic Review, First
Quarter, 2005, https://www.frbatlanta.org/-/media/Documents/filelegacydocs/
HOTCHKISSfinal.pdf.
4. Karahan, Pugsley, and Sahin, “Understanding the 30-Year Decline.”
www.brookings.edu /~/media /research /files /papers /2014/11/driving-decline-firm
-formation-rate-hathaway-litan /driving_decline_firm_formation_rate_hathaway_
litan.pdf.
.gov/, and U.S. Census data, https://www.census.gov/ces/dataproducts/bds/.
.gov/, and U.S. Census data, https://www.census.gov/ces/dataproducts/bds/.
Chapter 12. Rising Student Debt Is Not the Cause

1. S. Denning, “Why U.S. Entrepreneurship Is Dying,” Forbes, May 27, 2016,
http://www.forbes.com /sites /stevedenning /2016/05/27/why-us-entrepreneurship
-is-dying/#6c6db97440ab.
2. M. Daniels, “How Student Debt Harms the Economy,” Wall Street Journal,
January 27, 2015, http://www.wsj.com/articles/mitchell-e-daniels-how-student-debt
-harms-the-economy-1422401693.
3. J. Rosenberg, “Student Loan Debt Delays Startup Plans of Grads,” Detroit
News, June 12, 2016, http://www.detroitnews.com/story/business/personal-finance/
2016/06/12/student-loan-debt-delays-startup-plans-grads/85800204/.
4. S. Denning, “Entrepreneurship, Student Debt, and the Presidential Election,”
Forbes, May 29, 2016, http://www.forbes.com/sites/stevedenning/2016/05/29/entre
preneurship-student-debt-and-the-presidential-election/#35f918d442e8.
5. Denning, “Why U.S. Entrepreneurship Is Dying.”
6. G. Reader, “Bill Clinton Says Student Debt Is Holding Back Potential Entre-
preneurs,” Entrepreneur, June 14, 2016, https://www.entrepreneur.com/article/
277527.
7. The White House, the President’s Council on Jobs and Competitiveness,
“Taking Action, Building Confidence: Five Common Sense Initiatives to Boost
241
Y7322.indb 241 1/17/18 10:56:56 AM

N OT E S TO PAG E S 1 6 5 – 1 7 8
Jobs and Competitiveness,” October, 2011, http://files.jobs-council.com /jobs

council /files/2011/10/JobsCouncil_InterimReport_Oct11.pdf.
8. Gallup Organization, The Gallup-Purdue Index Report, September 25, 2015,
http://www.gallup.com/services/185924/gallup-purdue-index-2015-report.aspx.
9. George and Co., “Polls Show How Student Debt Affects Small Business En-
trepreneurship,” February 2, 2016, https://www.1888pressrelease.com/polls-shows
-how-student-debt-affects-small-business-entrepre-pr-582473.html.
10. B. Headd, “Student Debt among Young Entrepreneurs,” Small Business Facts,
November 2014, https://www.sba.gov/sites/default/files/Student%20Debt%20
Among%20Young%20Entrepreneurs%20Nov%202014.pdf.
11. K. Krishnan, and P. Wang, “The Cost of Financing Education: Can Student
Debt Hinder Entrepreneurship,” Working Paper, 2015, Northeastern University,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2586378.
12. B. Ambrose, L. Cordell, and S. Ma, “The Impact of Student Load Debt on Small
Business Formation,” Federal Reserve Bank of Philadelphia Working Paper, No. 15 –26,
https://www.philadelphiafed.org/-/media/research-and-data/publications/ working
-papers/2015/wp15 –26.pdf.
13. S. Baum, “Does Increasing Reliance on Student Debt Explain Declines in
Entrepreneurial Activity?,” Research Report, Urban Institute, 2015, http://www
.urban.org /sites /default /files /alfresco/publication-pdfs /2000080-Does-Increasing
-Reliance-on-Student-Debt-Explain-Declines-in-Entrepreneurial-Activity.pdf.
14. Author’s calculations from College Board data, https://trends.collegeboard
.org/student-aid, and U.S. Census data, https://www.census.gov/ces/dataproducts/
bds/.
15. C. Schoenberger, “Want To Be an Entrepreneur? Beware of Student Debt,”
Wall Street Journal, May 26, 2015, http://www.wsj.com/articles/want-to-be-an
-entrepreneur-beware-of-student-debt-1432318500.
Chapter 13. Don’t Blame a Loss of Moxie

1. D. Stangler, “The Looming Entrepreneurial Boom: How Policy Makers Can
Renew Startup Growth,” Ewing Marion Kauffman Foundation: New Entrepreneurial
Growth Agenda, 2017, http://www.kauffman.org/neg/neg-intro.
Why,” Inc., May 2015, http://www.inc.com/magazine/201505/leigh-buchanan/the
-vanishing-startups-in-decline.html.
3. Ibid.
242
Y7322.indb 242 1/17/18 10:56:56 AM

N OT E S TO PAG E S 1 7 8 – 2 0 2
4. R. Litan and I. Hathaway, “Declining Business Dynamism in the United States:

A Look at States and Metros,” Economic Studies at Brookings, May 2014, http://www
.brookings.edu/research/papers/2014/05/declining-business-dynamism-litan
5. Author’s calculations from Gallup/ Wells Fargo Small Business Index data,
https://wellsfargoworks.com/insights/small_business_index.php.
6. Gallup poll conducted June 1–5, 2016, http://www.gallup.com/poll /1597/
confidence-institutions.aspx.
7. B. Casselman, “Risk Averse Culture Affects U.S. Workers, Entrepreneurs,”
Wall Street Journal, June 2, 2013, http://www.wsj.com/articles/SB1000142412788732
4031404578481162903760052.
8. Author’s calculations from Survey of Consumer Finances data, https://www
.federalreserve.gov/econres/scfindex.htm.
9. European Commission, “Entrepreneurship in the EU and Beyond,” Flash Euro-
barometer 354, 2012, http://ec.europa.eu/public_opinion/flash/fl_354_en.pdf.
Chapter 14. Employees Have Become Too Expensive

1. Author’s calculation from Kaiser Family Foundation data, http://www.kff.org/
health-costs/report/2016-employer-health-benefits-survey/, and IRS Statistics of In-
come data, https://www.irs.gov/uac/soi-tax-stats-statistics-of-income.
2. Author’s calculation from Kaiser Family Foundation data, http://www.kff
.org/health-costs/report/2016-employer-health-benefits-survey/.
3. Author’s calculation from Kaiser Family Foundation data, http://www.kff
.org/health-costs/report/2016-employer-health-benefits-survey/.
4. J. Dearie and C. Geduldig, Where the Jobs Are: Entrepreneurship and the Soul
of the American Economy, Hoboken, NJ: Wiley, 2003.
5. J. Dearie, Testimony before the Subcommittee on Contracting and Work-
force, Committee on Small Business, U.S. House of Representatives, September 11,
2014, https://smallbusiness.house.gov/uploadedfiles/9-11-2014_dearie_testimony.
6. D. Stangler and J. Bell-Masterson, “Can Millennials Reverse America’s De-
clining Rates of Entrepreneurship?,” Washington Monthly, August 17, 2014, http://
www.washingtonmonthly.com/ten-miles square/2014/08/can_millennials_reverse
_americ051694.php.
7. B. Pugsley and A. Sahin, “Grown-Up Business Cycles,” Federal Reserve Bank
of New York Staff Reports, No. 707, December 2014, https://www.newyorkfed.org/
medialibrary/media/research/staff_reports/sr707.pdf.
243
Y7322.indb 243 1/17/18 10:56:56 AM

N OT E S TO PAG E S 2 0 7 – 2 2 5
Chapter 15. Chains Have Replaced Independent Employers

Why,” Inc., May 2015, https://www.inc.com/magazine/201505/leigh-buchanan/
the-vanishing-startups-in-decline.html.
dataproducts/bds/.
3. Author’s calculations from U.S. Census data, https://www.census.gov/econ/.
Chapter 16. The Story the Data Are Telling

1. Author’s calculations from U.S. Census data, https://www.census.gov/econ/.
2. Author’s calculations from U.S. Census data, https://www.census.gov/econ/
nonemployer/.
244
Y7322.indb 244 1/17/18 10:56:56 AM

Index
Numbers in italics indicate figures.
acquisitions, 211–212 business angels, 65 – 66, 69 –70, 72 –73,

Affordable Care Act, 117, 120, 190 –191, 220 –221
227 business deaths, outpacing business
age, risk aversion and, 176 births, 17
aging, entrepreneurship and, 145 –152 Business Dynamics Statistics (U.S.
Ambrose, Brent, 166, 172 –173 Census Bureau), 25 –26
American entrepreneurialism, 1, 4 – 6, business dynamism, 92 –93
216 business equity, families’ ownership
Angel Capital Association, 72 of, 39
business failures, rates of, 9, 34
Bain Capital, 212 business income, nonreported, 126
banks, financing by, 96 –98 business ownership, earnings from,
Baum, Sandy, 167 50 –54
BDS. See Business Dynamics Statistics
benefits for employees, costs of, Camarota, Steven, 138, 139 –140
187–194, 203, 219, 227 capital, access to, 95 –102, 163 –164,
big businesses: bank lending to, 96 –97; 169, 221
employment trends in, 87– 88; talent capital investment: entrepreneurship
for, 200; wages paid by, 194 –195 and, 3 – 4; spending on, 90 –91
Bilamoune-Lutz, Mina, 129 Casselman, Ben, 17, 148 –149
Brin, Sergey, 1 C corporations, 21, 45, 46, 51
Bruce, Donald, 127, 128 Center for Venture Research (Univer-
Burton, David, 1, 4 –5, 108 sity of New Hampshire), 69
business acquisitions, 211–212 chain businesses: adding workers,
business activity, family income from, 200; employer startups and, 207;
57–58 replacing independent companies,
245
Y7322.indb 245 1/17/18 10:56:56 AM

INDEX
chain businesses (continued) economic mobility, new businesses

205 –206; rise of, 14, 205 –215, and, 2 –3
220; shift to, 200; technology and, economy, carrying capacity of, 36, 38
210 –211 e-corp tax status, 124
Challenger, Gray and Christmas, 8, efficiency, 4
23 –25 employer businesses: capital expendi-
Chile, encouraging foreign entrepre- tures of, 90 –91; decline in, 26 –28,
neurship, 134 79 – 83, 85 – 86, 90; economic impact
Clifton, Jim, 17 of, 90 –91; entrepreneurial activity
commercial banking, changes in, by, 225; failures of, 34 –37; formation
96 –98 rates of, 33 –37; initial size of, 85 – 86;
community banks, 97 numbers of employees in, 83 – 88; per
compensation: hourly, 188; shifts in, capita number of, 27, 32 –34, 37–38;
219 productivity and, 90, 92; stock of,
compliance: costs of, 110 –111; learning 34, 37–38, 79 – 83, 105, 219 –220;
curve for, 110, 115 tracking of, 25 –26. See also employer
Cooley, LLP, 76 creation; employer startups
Cordell, Larry, 166, 172 –173 employer creation: downturn in,
Crain, Mark, 111 4 – 6, 12; effects of, 6; pace of, 10;
Crain, Nicole, 111 significance of, 6. See also employer
credit, access to, small business creation businesses; employer startups
and, 11. See also capital employer startups, 8; aging populations
credit card debt, availability of, 101 and, 145 –152; boosting, 214; capital
Cullen, Julie Berry, 128 access and, 95, 100 –102; chain busi-
Current Population Survey (BLS and nesses and, 207; downward trend
Census Bureau), 18, 39 in, 129 –130; generic decline in,
CVR. See Center for Venture Research 213; immigration and, 133 –146; per
capita rate of, 156, 157; population
Daniels, Mitch, 163 growth and, 153 –162; regulation and,
Dearie, John R., 30, 99, 123 –124, 127, 116 –119; risk aversion and, 176 –178,
134 –135, 200 181–182; size of, 200, 209; slowdown
Decker, Ryan, 63 – 64, 70, 85 – 86, in, policy responses to, 216 –217,
118 –119, 130 220 –223; student debt levels and,
deleveraging, 103 163 –175; talent for, 200
Denning, Steve, 163, 164 endogeneity bias, 127
Deskins, John, 127 entrepreneurial businesses, stocks and
Dodd-Frank legislation, 117 flows of, 31–33
246
Y7322.indb 246 1/17/18 10:56:56 AM

INDEX
entrepreneurial income, 58 –59 Federal Financial Institutions Examina-

entrepreneurs, financial position of, tion Council, 97
54 –57 Federal Register, size of, 112 –113, 117
entrepreneurs, offering health insur- Federal Reserve, 38
ance, 189 –190 FFIEC. See Federal Financial Institu-
entrepreneurship: aging populations tions Examination Council
and, 145 –152; Americans’ attitude flows, vs. stocks, 31–33
toward, 1, 177–180, 216; changes in,
217–221, 227; decline in, concern Garello, Pierre, 129
about, 2 – 4, 17–18; as fraction of Gates, Bill, 1
income, 57– 61; immigrants and, 134, Geduldig, Courtney, 30, 200
137–140; intention of, 181, 183 –184, Gladwell, Malcolm, 1
185; legal form of, 218 (see also C cor- Global Entrepreneurship Monitor,
porations; partnerships; S corpora- 36 –37, 148, 149
tions; sole proprietorships); measures Goldschlag, Nathan, 115 –119
of, 5, 31; personal equity and, 59 – 60; Gordon, Roger, 128
population growth and, 155 –162; government action, call for, 30 –31
profitability of, 114, 159 –160; rate Great Recession, 17, 51, 53
of, 26 –27, 36 –37; regulation and, Greenblatt, Drew, 108, 111
108 –121; rising indicators of, 40 – 48, Gurley, Tami, 127
136, 150 –151, 160; in slow-growth
countries, 149; social mobility and, Haltiwanger, John, 25, 93
2 –3; spread across more businesses, Harrison, J. D., 17
14; student debt and, 163 –175; Hathaway, Ian, 26 –28, 30, 33, 37, 132,
taxation and, 123 –132; technol- 134, 149, 156, 177, 178
ogy and, 197; transformational, 64; health insurance, regulation of,
unincorporated self-employment 120 –121. See also Affordable Care Act
as measure of, 18, 20; young people health insurance for employees: cost of,
and, 183 –184, 185 187, 189 –192; reductions in, 193. See
establishments, new, rise of, 207–208 also benefits for employees
exit performance, for venture capital- Heim, Bradley, 121
backed companies, 73 –75 high-potential businesses, 5, 9, 50, 63,
220 –221; growth rate of, 63 – 64;
failure, fear of, 178 –179, 182. See also investment in, 64 –72, 106; mea-
risk aversion surement problems with, 66 – 67;
Fairlie, Rob, 39, 138 –139, 202 performance of, 73 –75; valuation of,
families, business ownership of, 39 75 –77
247
Y7322.indb 247 1/17/18 10:56:56 AM

INDEX
households (U.S.), financial position Khan, Lina, 95, 98

of, 38 –39 Kim, Anthony, 125, 127
Kravis, Marie-Josée, 110, 117
immigrants: attracting of, programs for, Krishnan, Karthik, 166, 172 –173
141–142; entrepreneurship of, 134,
137–140; non-employer businesses labor, costs of, 187–199, 204, 219, 227
and, 136, 139 –140 labor force participation rate, 157–159,
immigration, 222 –223; employer 224
creation and, 10; employer startups laid-off workers, starting companies,
and, 133 –146 7– 8
income: entrepreneurial fraction of, Lazear, Ed, 147–148, 149
57– 61; inequality of, 226 Liang, James, 147–148, 149
incorporated self-employment, 21–23, licensing, state requirements for, 110
197, 218. See also self-employment Litan, Robert, 26 –28, 30, 33, 37, 134,
independent contractors, 20, 42; labor 135, 149, 156, 178, 207
costs and, 198 –199 Long, James, 128
innovation: entrepreneurship and, 4 Lowrey, Annie, 17–18
(see also technology); productivity Lurie, Ithai, 121
and, 4; slowdown in, 91–92 Lynn, Barry, 95, 98
Internal Revenue Service, as data
source, 41– 43, 51, 53 Ma, Shuwei, 166
Internet bubble, 67–71, 74 mergers, 212
micro businesses, student debt and,
Jackson, Shirley Ann, 164 166, 173
job creation, decline in, 227 Morelix, Arnobio, 163 –164
job lock, 120
Jobs, Steve, 1 National Opinion Research Center
job seekers, desiring to start businesses, (NORC; University of Chicago), 38
23 –25 National Venture Capital Association
(NVCA), 67
Kane, Tim, 108, 123, 124, 127 Nelson, Susan, 126
Karahan, Fatih, 155 –156 net worth, 56 –57; employer startups
Kauffman (Ewing Marion) Founda- and, 105
tion, 133, 146 new businesses: employment in, 8, 84 –
Kauffman Index of Entrepreneurial 86; failure rates of, 37; financing for,
Activity (Ewing Marion Kauffman 95 –96, 100 –105; formation of, 2 – 4
Foundation), 39, 105 –106 (see also employer creation); health
Kelley, Donna, 177–178 insurance benefits and, 190 –191, 194;
248
Y7322.indb 248 1/17/18 10:56:56 AM

INDEX
productivity and, 93; regulation and, personal savings rate, employer startups
108 –121; size of, 209; talent available and, 103 –104, 221. See also savings
for, 200; taxation and, 124 –132. See Pew Foundation, 22 –23
also employer startups; non-employer Piketty, Thomas, 58
businesses population, aging of, and employer
non-employer businesses, 226: capital startups, 145 –152, 224
expenditures of, 90 –91; economic population growth, employer startups
impact of, 90 –91; growth of, 40 – 41; and, 153 –162, 224
immigrants and, 136, 139 –140; Prescott, Edward, 90
increase in, 13 –14, 31; innovation productivity: chain businesses and, 210;
and, 91–92; per capita number of, entrepreneurship and, 3 – 4; growth
41; regulation and, 113 –114; sales of, rate and, 90, 92 –93; innovation
90, 225; shift to, 80 – 81, 113 –114, and, 4
225 –226; stock of, 79 – 83 profitability, increases in, 51–54, 114
non-employers, entrepreneurial activity Puente, Lucas, 108 –109
by, 225 Pugsley, Benjamin, 155 –156
nonfarm loans, 98
nonresidential loans, 98 regulation, 10, 108 –121, 222; business
NORC. See National Opinion Re- failure and, 115; business-friendly,
search Center 120 –121; complexity of, 111, 112; dif-
NVCA. See National Venture Capital fering regimes for, 118 –119; employer
Association startups and, 116 –119; profitability
and, 114
Obama administration, 164 regulation hypothesis, 109 –110
Ohanian, Lee, 90 retail, employment decline in, 85
opportunity costs, 202 retirement plans, costs of, 192
Ortmans, Jonathan, 135, 139 risk aversion: age and, 176; Americans’,
outsourcing, 187 177–178, 181–182; changes in, 176;
employer startups and, 176 –178,
partnerships, 42 – 46, 82; income 181–182, 224; student debt and,
of, 53 170 –172
pass-through entities, 82; income of, Romney, Mitt, 212
51–54, 191; profitability of, 114; rise
in, 42 – 45. See also partnerships; Saez, Emmanuel, 58
S corporations; sole proprietorships Sahin, Aysegul, 155 –156
patents, slowdown in, from small busi- savings: business startups and, 163 –164;
nesses, 91–92 decline in, 95; entrepreneurship and,
Pe’er, Avid, 36 103 –105; risk and, 182
249
Y7322.indb 249 1/17/18 10:56:56 AM

INDEX
S corporations, 21, 42 – 45, 46, 51– small business loans, availability of,
54, 82 100 –101
seasonal workers, 23 sole proprietorships, 42 – 45, 82; hiring
seed round financing, 76 by, 195 –199; income for, under-
self-employment: financial position reporting of, 126; labor spending by,
and, 55 –57; meanings of, 20 –21; 195 –199; prevalence of, 192; profit
part-time, 19 –20; percentage of margins of, 53 –54; as proxies for
population transitioning to, 39, 40; small business, 53
significance of, 18; student debt and, Stangler, Dane, 17, 134, 176
165 –166; tax deduction for, 41– 42, Start-Up Chile, 134, 141
43; taxation and, 127–128. See also startup companies, 147–148. See also
incorporated self-employment; un- employer startups; high-potential
incorporated self-employment businesses; small businesses
self-employment taxes, 48, 106 startup deficit, 85 – 86
Sequoia Capital, 65 start-up visa program, 141–142
Series A financings, 76 stocks, vs. flows, 31–33
services, employment decline in, 85 student debt, 10; employer startups
Singer, Audrey, 137 and, 163 –175, 223 –224; rising
slow-growth countries, entrepreneur- entrepreneurship and, 168 –169; self-
ship in, 149 employment and, 165 –166
Small Business Administration, Office Subchapter S corporations. See S
of Advocacy, 80 corporations
small businesses: Americans’ attitude Survey of Consumer Finances (Federal
toward, 180 –181; attracting labor, Reserve), 38 –39, 55, 57–58, 60
219; bank lending to, 96 –98; bor-
rowing by, 100 –101; employment Tabarrok, Alexander, 115 –119
trends in, 86 – 89; health insurance talent, access to, 199 –201
benefits and, 190 –191, 193; organiza- taxation, 10, 43, 44, 222; avoidance,
tion of, 51 (see also C corporations; 125 –127; downward trend in,
partnerships; pass-through entities; 129 –130; effects of, on business, 125;
S corporations; sole proprietor- employer creation and, 11; entrepre-
ships); owners’ satisfaction and, 179; neurship and, 123 –132; negative view
profitability of, 160; regulation and, of, 125; new businesses and, 124 –132;
109 –116, 118; revenues of, 90; as self-employment and, 127–128
share of annual payroll, 195; success tax gap, 126
of, 14 –15; talent available for, 201; technology: chain businesses and, 205,
trade receivables for, 102; wages paid 206, 210 –211; effect of, on entrepre-
by, 194 –195, 198 neurship, 197; entrepreneurship and,
250
Y7322.indb 250 1/17/18 10:56:56 AM

INDEX
12 –14; rise in, 187; small business Vertinsky, Ilan, 36

growth and, 15 visas, encouraging business startups, 10
Thiel, Peter, 65
Tocqueville, Alexis de, 1 wages: falling, 194; gap in, 194 –195;
trade credit, 102 stagnation of, 95
turnover, 4 Wang, Hui, 147–148, 149
Wang, Pinshuo, 166, 172 –173
unincorporated self-employment, 7, Where the Jobs Are (Dearie and Gedul-
18 –23, 197, 218 dig), 30, 200
United States, industrial composition
of, 212 –213 Yellen, Janet, 2
U.S. Census Bureau, 5, 25 young people, entrepreneurship and,
183 –184, 185
venture capitalists (VCs), 65 –75,
220 –221 Zuckerberg, Mark, 1
251
Y7322.indb 251 1/17/18 10:56:56 AM

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Is Entrepreneurship Dead?

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THE TRUTH ABOUT

New Haven and London

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Copyright © 2018 by Scott A. Shane. All rights reserved. This book

Yale University Press books may be purchased in quantity for

Set in Gotham and Adobe Garamond types by Newgen North America.

Library of Congress Control Number: 2017954786

This paper meets the requirements of

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14 Employees Have Become Too Expensive 187

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If you think you can understand complex economic phenomena

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Economics, both of whom helped this book immensely. While an

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We Americans love entrepreneurs. As Malcolm Gladwell wrote,

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data sources. For instance, the formation of “new employers”—the

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for many households to improve their economic circumstances and

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current technology, which generally yields higher productivity than

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care, energy and environmental regulation, administrative law and

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affected a key aspect of the economy, like productivity, employment,

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unintended consequences. Bearing that risk makes sense only if the

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looking to start companies is well below 1980s levels, according to

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the problem with American entrepreneurship and the effective solu-

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Finally, even if the decline in the rate of employer creation was

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Another common “solution” to the decline in new employer busi-

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of startups in America. Moreover, if older businesses, run by entre-

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on eBay. She makes more than she would in a minimum-wage job,

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computer programs such as QuickBooks, and frequent visits from

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If existing companies are doing ﬁne and expanding, new companies

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In the chapters that follow, I will challenge the argument that

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We keep reading that Americans are less entrepreneurial than

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Unincorporated Self-Employment Is in Decline

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Figure 1.1. The Unincorporated Self-Employment Rate

in long-term decline. These people represented 8.7 percent of the

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Figure 1.2. The Secondary Self-Employment Rate

fewer people engage in self-employment as their secondary occupa-

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To ﬁgure out the unincorporated self-employment rate, the BLS

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