The reduction in the number of entrepreneurs
It seems that commercial dynamism and entrepreneurship have decreased in the US in recent decades. One sign is the drop in the business entrepreneurship rate, which is determined using data from the U.S. Census Bureau’s “business dynamics” section. In this context, an enterprise is defined as a business that employs one or more people outside the owner, and the entrepreneurship rate is the percentage of businesses that have been in operation for less than a year overall.
Figure 1 illustrates how the rate of entrepreneurship decreased from over 10% in the early 1980s to 8% in 2018; of the 5.3 million businesses in 2018, 430,000 were start-ups. Most years see growth in the economy as a whole and an increase in the number of startups compared to failures.
The rate of entrepreneurship was lower than the rate of shutdowns for a number of years in a row during the economic slump that occurred 10 years ago. It took several years for the unemployment rate to drop to the pre-crisis low since the entrepreneurship rate has not completely recovered from the recession. According to economist John Haltiwanger, “start-ups have been hit hard and have not come back, which is one of the reasons why it took us so long to recover from the Great Recession.” A Wall Street Journal news report concurred, saying that “in the years after the official end of the recession, the slow pace of new business creation has led to a slow recovery and unusually high unemployment.”
Self-employment, which encompasses both businesses with and without staff, is another indicator of entrepreneurship. While it was fairly constant throughout the 1990s and the first part of the 2000s, self-employment has been declining during the last ten years. When the epidemic started in early 2020, the percentage of self-employed individuals in all private sector jobs fell from 14.1% in 2009 to 12.3%.
Thus, small and young companies play an increasingly smaller role in the economy. Economists Germán Gutiérrez and Thomas Philippon noted, referring to the downward trend of start-ups: “In addition to the decline in the entry rate of start-ups, the size of young companies is also declining: fewer entrants, smaller at the beginning and slower growth.”
The number of small businesses—those with less than 500 employees—rose by 7% between 1998 and 2017, while the number of big businesses—those with more than 500 employees—rose by 23% over the same period. While employment at major organizations climbed by 28% over the same time, employment at small enterprises increased by 10% overall. Concurrently, the proportion of employers’ firms with fewer than five years of existence fell from 38% of all enterprises in 1982 to 29% in 2018.
Smaller businesses were more severely impacted than larger ones when the COVID-19 pandemic caused the economy to enter a recession in 2020 and resulted in the irreversible closure of several firms. By the end of 2020, there were around 30% fewer small firms and less revenue overall than there was a year earlier. The leisure and hospitality sectors have the highest unemployment rates, and a substantial number of restaurants—roughly one-third of New York City’s restaurants—have closed.
Startups are declining as the economy closes in the first part of 2020. In contrast, the “enterprise formation” statistics from the U.S. According to the Census Bureau, startups had a significant summer bounce before contracting once again in the fall.
The increase in the summer entrepreneurship rate might be attributed to the postponement of some start-ups earlier in the year, the appearance of new internet business prospects, and the forced startup of individuals who were sacked from their prior positions. Entrepreneurship is fueled by dilemmas, but the summertime startup boom might also be the result of phony company registrations made in order to get catastrophe funding tied to COVID-19.
Why be alarmed?
The start-up rate has increased since the early 2020 downturn, but there are worries that the long-term declining trend will hold. Economists find this tendency perplexing: as information technology has advanced and the industry has shifted to a service-based economy, many small businesses’ operational expenses have decreased, which is contrary to what should have fostered entrepreneurship. The personal computer revolution of the 1980s gave start-ups access to technologies like word processing, databases, and invoice processing that were previously exclusive to huge corporations, even before the Internet revolution of the 1990s.
The causes of the fall in the number of start-ups remain mostly unclear to economists. According to John Haltiwange’s research, the sectors of retail and services had the largest fall in new business before 2000. These businesses were transitioning from single locations to national chains, which might boost productivity and help the economy as a whole.
Haltiwanger and colleagues have discovered, however, that the fall in start-ups after 2000 is more frequent, which might indicate that the economy is become more inflexible. In a study conducted less than five years ago, economist Steve Davis discovered that “the decline in the share of young companies is common in all industries and states of the United States”: between 2000 and 2018, the employment share of young companies fell by 60% in high-tech manufacturing, 56% in the information industry, 53% in the high-tech industry, 38% in services, 38% in manufacturing, 33% in construction, and 13% in retail. These reductions point to a weakening of the economy.
The growth of “zombie companies,” according to senior fund manager at Morgan Stanley Ruchir Sharma, is another sign that the US economy is losing vigor. These corporations have not even been able to pay loan interest with their income during the last three years. Government policies have helped zombie companies thrive, but they have also hindered growth because of resource mismatch. Before the 2020 coronavirus pandemic, the percentage of listed zombie companies in the US had risen from several percentage points in 2000 to 19%.
The decrease in worker redistribution rates (measured by employment and separation) and job redistribution rates (measured by job creation and destruction) are two other indications of the fall in dynamism. As noted by Davis and Haltiwanger:
The job market’s mobility in the United States has significantly decreased in recent decades. The rate of worker redistribution declined by more than a quarter after 2000, whereas the rate of job redistribution fell by more than a quarter after 1990. States, sectors, and age, sex, and educational attainment-based demographic groupings are all affected by this fall.
What led to this decrease in energy? According to Davis and Haltiwanger, this is the result of changing consumer behavior, shifting market dynamics, and shifting governmental regulations:
A number of factors, including the shift to more established businesses and institutions, the aging of the labor force, the evolution of supply chains and business models (such as in retail), the effects of the information revolution on employment behavior, and certain developments in policy, have contributed to a decline in mobility. In addition to unrestricted employment, policies that regulate the supply side of the labor force, such as creating protected classes of workers and “job locking” in relation to employer-provided health insurance, limit the flexibility of the labor market.
The following discussion of the significance of regulation for startups and economic dynamism takes into account non-policy considerations, one of which is the evolving demographic composition of the US population. The Congressional Budget Office ( CBO ) discovered that “people between the ages of 35 and 54 are more likely to become entrepreneurs and succeed in their new careers than those of other age groups, but the proportion of this age group in the labor force has been declining since 2000.”
The fact that fewer young people seem to be launching firms than in the past is another contributing factor. In a similar vein, the Kaufman Foundation polled young people aged 20-34 and found that “in 1996, 35% of start-ups were founded by young people, compared with 18% by 2014.” For example, “at the age of 30, less than 4% of millennials reported that their main job in the previous year was self-employed, compared with 5.4% in Generation X and 6.7% for the baby boomer generation.” (Kaufman Foundation, 2016).
Financial concerns might be a contributing element in the decline in the number of start-ups. Due to the overwhelming amount of student debt that exists today, young individuals may find it more difficult to get funding and may decide not to start a company. Young individuals who are interested in launching a company have said that money is a barrier in public opinion surveys. Furthermore, since homes are often used as collateral for business loans, the drop in home values during the 2007–2009 crisis also seems to have reduced the strength of start-ups.
A role in shaping the ideological climate of youth may also be played. Influencers who shape public policy and are popular with youth, such as politicians and entertainers, often vilify capitalism and prosperity. But there are other cultural aspects that encourage entrepreneurship. A lot of TV shows, like the reality series Shark Tank, have portrayed startups in a good light, and several tech entrepreneurs have also received a lot of recognition. Furthermore, in recent decades, entrepreneurial endeavors at American colleges have flourished.
Should we concentrate on starting our own business?
Indeed, there are several causes. For the purpose of creating jobs, new businesses are crucial. From the standpoint of the businesses that employ people, new businesses generated 2.4 million employment in 2018, or 15% of all jobs added in that year. Nonetheless, the effect of start-ups is more noticeable when net job prospects are taken into account. While start-ups exclusively generate employment, mature businesses both create and eliminate workers. Since many established businesses either downsize or shut, start-ups have often generated the majority of net employment in a given year. Nearly all of the 2.5 million net employment produced by employers in 2018 came from the 2.4 million jobs created by start-up businesses.
Local communities are revitalized as a result of startups providing job alternatives for those displaced by decreasing companies. A number of start-ups have developed into robust, sizable businesses that power the national economy. According to research by economists Ryan Decker and colleagues, 15% of US businesses expand by more than 25% annually. Nearly half of the jobs created so far have come from these fastest-growing, mainly new enterprises. Bezos established Amazon in his Seattle garage in 1994. He was the lone employee when this happened, but today the firm has approximately a million workers.
The productivity of new entrants into the manufacturing industry is much higher than that of existing enterprises, as the Congressional Budget Office report notes, and this encourages productivity growth because “new enterprises are usually more productive than previously established enterprises.” Productivity growth is positively correlated with the employment share of new enterprises across jurisdictions and sectors. It represents the transfer of employment from low-productivity firms to more productive enterprises, as Haltiwanger noted, “Fast job redistribution has greatly improved productivity.”
In order to drive innovation and competition, startups are essential. In his studies, renowned Harvard Business School professor Clayton Christensen emphasized the significance of negative innovation. These novel items could first target a certain market niche before upending and dispensing with established businesses and sectors. Established businesses often overlook the tastes and technical advancements made by start-ups in favor of expanding into their current markets.
For instance, although Digital Equipment Corporation (DEC) and other innovative businesses led the way in the 1960s and 1970s, IBM controlled the mainframe computer industry in the 1960s and delayed devoting its attention to compact computers. Then, when Apple and other start-ups introduced personal computers in the late 1970s, both mainframe and small computer firms missed the shift. Then, when Compaq pioneered the transition to a portable computer in the 1980s, Apple and IBM first missed the mark.
Christensen discovered that the new business had comparable disruptive models in a variety of sectors, such as construction equipment, motorbikes, ships, disk drives, steel mills, retailers, and transistor radios. According to an innovation research, “New companies are the key way to introduce innovation into the market. Their innovative methods are essentially different from those of existing companies.”
Startups have the power to upend highly regulated sectors in addition to launching ground-breaking innovations. Uber has revolutionized the taxi sector by cutting prices and enhancing convenience. Through the provision of innovative lending, savings, and payment alternatives, a significant number of Fintech start-ups are lowering the cost of financial services. During the 1970s and 1980s, FedEx introduced emergency letters outside of the US legal monopoly, and MCI shattered the feeble AT&T telephone monopoly. Postal Services, which is partly challenging the U.S.-dominated letter market. Postal Service.
Among the concerns raised by this is the fact that “new companies provide innovative products and services, improve labor productivity, and ensure market competition.” The Congressional Budget Office said in 2020 that “entrepreneurship in the economy has declined significantly in the past 40 years.”
The conclusion for policymakers is that the primary barrier to the establishment of new businesses is regulatory restrictions, which they should eliminate.
Regulation’s negative effects on entrepreneurship
The government imposes a range of restrictions on businesses. Some of these requirements are industry-wide (e.g., labor, accounting, safety, environment, and advertising); others are sector-specific (e.g., energy, transportation, agricultural, financial services, and energy).
A regulation is a law that forbids, limits, or mandates behavior. Companies have to pay government-mandated salaries and benefits, invest in equipment and processes, engage specialists to oversee these requirements, and spend money in order to comply. Business executives’ time and energy are drained by regulations, which also impede competitiveness and innovation. Many restrictions provide advantages, but it is important to weigh those advantages against all of the expenses they entail.
The federal government regulates businesses in a number of areas, including trade unions, privacy, antitrust, advertising authenticity, foreign trade, immigration and employment qualifications, family leave, health and retirement benefits, wages and overtime, environment, occupational health and safety, and disability. Additional industry oversight is also implemented by the federal government. There are around 260 institutions responsible for putting these rules into practice, and some of them overlap. For instance, a start-up may have to cope with the regulatory requirements of four separate federal authorities for its newly released smartphone health application.
The total amount of government rules has grown throughout the years. There are now 186,000 pages of federal rules, up from over 138,000 pages in 2000 and 71,000 pages in 1975. Annually, federal agencies typically enact over 3,000 new regulations, often known as “final rules,” which are available online at www.federalregister.gov. Rough calculations put the annual direct cost of government regulations on the economy at $2 trillion.
State and municipal rules exist in addition to federal regulations, however it is unclear how much they cost altogether. State governments oversee the operation of certain businesses, including alcohol and utilities, and apply commercial rules pertaining to worker compensation, health care, the environment, occupational licenses, minimum salaries, and other matters. In addition, zoning, business licensing, land use, and other activities are governed by local governments. Certain sectors, including green building rules, are within the jurisdiction of these three tiers of government.
What is the significance of regulations for small businesses? The National Federation of Independent Enterprises (NFIB) mandated small firms to participate in a poll in March 2020.
The Lord considers 75 distinct economic concerns to be significant for his business. Apart from the expenses associated with obtaining health insurance, recruiting and maintaining qualified staff, and paying taxes, the largest issue that small firms face is “unreasonable government supervision”. Throughout the 1980s, the organization’s studies have regularly shown that one of the “most important issues” that small firms must deal with is regulation.
For a some time now, policymakers have been worried about how regulations will affect small enterprises. Federal agencies are required under the Regulatory Flexibility Act of 1980, as well as by presidential orders and later regulations, to evaluate how their proposed regulatory standards might affect small companies. Institutions that are pertinent must decide whether a rule may have a “significant” effect and influence a “large number” of small enterprises. If so, less onerous options ought to be taken into account by institutions. Numerous states enacted revisions similar to the federal regulation after it was approved.
Despite these efforts, regulation often has a negative impact on start-ups more than it does on established businesses, mostly because of three factors: entrance obstacles, economies of scale in compliance, and disproportionate cost burden.
First of all, in comparison to bigger organizations, small businesses incur more costs due to oversight. One such is the minimum wage legislation. Due to their propensity to pay lesser salaries, smaller businesses are sometimes hurt harder. For instance, in 2019 the average weekly salary for businesses with less than 100 employees was $976, but the average weekly wage for businesses with more than 1,000 employees was $11914. Approximately 50% of minimum wage earners work for companies with less than 100 employees.
Due of their small size and frequently low funds, start-ups are especially affected by the minimum wage. When entrepreneurs “help” their companies, they often imply that they raise money from friends, family, and credit cards to cover costs, and during the first few years of their business, they don’t make much money. According to an analysis of 2143 technological start-ups in 2017, half of the founders’ average hourly wage in their first year of employment was $561.
From 1982 to 2014, the minimum salary and startup survival statistics of every state were examined by economist Xiaohui Gao. She discovered that “for every 1% increase in the minimum wage, the survival rate of start-ups will decrease by 3.5%.” She came to the conclusion that “new companies tend to have a higher proportion of minimum wage workers. They often operate with small or even negative profits, and the minimum wage makes them face mandatory labor cost growth in the start-up period.”
Economies of scale in compliance are start-ups’ second regulatory drawback. Entrepreneurs must get familiar with a number of basic company rules as well as industry-specific restrictions before launching a start-up. Unlike big businesses, they don’t have inside specialists to help them. Investments in machinery, company procedures, and compliance officers may be necessary due to regulations; bigger businesses may be able to split these expenses on higher sales.
Small company owners’ time and energy will be devoured by regulatory requirements in the absence of compLIs. This issue is shown by the New York Times article about a family apple orchard: the federal restrictions on pesticide spraying surpass 10,000 words, and there are many requirements for ladders, deer dung, storage, fertilizer, sanitation, cars, training, and other projects. Due to the increasing regulatory burden, an expert quoted in the article stated, “More of our fruits and vegetables will be grown by large domestic producers capable of complying with regulatory regulations – at the expense of smaller competitors – and by foreign farmers.” The orchard maintains 13 detailed logs to track most of the rules.
Small company owners’ success in the market has been shattered by the quantity and complexity of regulatory requirements, and their attention has shifted to “management that puts compliance above growth and innovation”. Entrepreneurs are fighting a losing battle to survive, with almost half of newly established enterprises failing within the first five years. Consequently, it is expensive for bureaucratic pressure to distract entrepreneurs from the market.
Legal barriers to market entry, such as professional permits and demand certification rules that require entry into certain industries to obtain government approval, are the third regulatory harm faced by start-ups. These regulations are typically imposed with the support of established businesses, who use their political clout to protect their territory from newcomers.
According to economist George Stigler, interest groups will “capture” regulators, meaning that they would act as agents for established businesses. By means of regulations, the in-regents use the government to maintain their monopolistic position, discourage potential entrants, and sustain elevated pricing. The Interstate Commerce Commission, which controlled railroads from 1887 until 1995, is a prime example of capture. The Railway Administration “was initially an institution that protects the public from the exploitation of railway companies,” but over time it evolved into “an institution that protects railway companies from competition from trucks and other means of transportation,” according to economist Milton Friedman.
More policy power is available to block entrance the bigger and more expansive the government is. According to a research conducted by Simeon Djankov and his colleagues on 85 countries, corruption is more severe in nations with more regulations, but product quality has not increased. According to the author, access restrictions often work better for politicians than for the general public.
