Where’s America’s Entrepreneurial Economy?

Despite many perceptions, entrepreneurship and self-employment have been on the decline for years, especially among Millennials.
March 2015
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By Aaron M. Renn  |  Columnist
Senior Fellow at the Manhattan Institute

In many ways, it seems like this would be a golden age for freelancing and entrepreneurship: The Web, after all, makes it easy to market yourself and your firm. The growth of co-working space reduces the cost of an office. Open-source data and the cloud make it inexpensive to start a tech company, compared to the millions of dollars in startup capital needed during the dot-com era. “Makerspaces” provide low-cost access to expensive equipment to design and manufacture products. Obamacare ensures that health insurance is always available. And the job losses of recent years have produced incentives for self-employment, for transitional purposes if nothing else.

Yet despite our perceptions, entrepreneurship has trended downward in recent decades. The Brookings Institution found that so-called “firm entry rates” have declined since the 1970s and that they suffered a steep fall post-2005. And though millennials are often seen as an entrepreneurial generation, The Wall Street Journal reports that business ownership among those under the age of 30 recently hit a 24-year low. Self-employment has seen a similar downward trend. A study by Economic Modeling Specialists International found that both the total number of self-employed and their share of jobs have fallen since 2006.

So with conditions seemingly so ripe for an economy fueled by entrepreneurs and freelancers, why are we not seeing its emergence on any large scale? And what can be done about that?

To start with, what the headlines miss is the very different dynamics of entrepreneurship and freelancing in one industry compared to another. The tech industry is disproportionately high-skill, and it is indeed booming. It has established markets for independent contracting at high rates. And in a booming market, a startup is lower risk as there is fallback employment. A failed startup is even considered a badge of honor in the field.

Life is very different for people in other lines of work where opportunities for entrepreneurship are more limited. Much of the overall decline in self-employment came in construction and real estate, two fields that were hammered during the Great Recession and have yet to recover. For those who lack in-demand market skills or for those losing their jobs in industries being disrupted, self-employment is a very different prospect than it is for software creators. Many of these less-fortunate freelancers are stuck in what might be called the Fiverr/TaskRabbit economy, picking up a few dollars here and there performing temporary, one-time services. Much of the value in services like Fiverr or TaskRabbit is accruing to the platform owners, not the workers.

There are other factors at play as well. Starting a business in a field with slow cycles of disruption and in industries dominated much more by large firms than in the past is more daunting than launching a startup to write apps. Additionally, barriers in many cases have increased, not decreased. The continuing growth in occupational licensing, for example, raises obstacles to entry in many fields, with dubious public benefits. And as a person who until recently was self-employed, I can attest that Obamacare significantly increased my health insurance costs.

Factors like those work against efforts to create the pro-entrepreneurial climate that we critically need.  A 2014 study from the Kauffman Foundation found that young firms account for 20 percent of new job creation and virtually all new jobs on a net basis. An economy dominated by firms in their mature phases versus their growth years will be inherently less dynamic.

The freelance economy also could use some help. Labor-force participation rates have fallen during the Great Recession. But even female labor-force participation, which had been rising for some time, peaked in 1999 and is projected to decline through at least 2022. Unsurprisingly, women with younger children have lower-than-average workforce-participation rates. Self-employment, potentially on a part-time basis, has a lot of potential for tapping this resource, so providing flexibility for mothers who want or need to work is crucial.

There is also untapped potential in the baby boom generation. Apart from the need many of them will have to continue earning income, a lot of boomers appear unlikely to want to truly retire in retirement. Many of them will stay actively engaged in life and in their communities. With the skills and experiences they’ve accumulated over a lifetime, they have a lot of value to continue to add economically. A small business or freelancing second career could be a perfect vehicle for many of them to do this.

A recovering national economy is likely to provide a boost to entrepreneurship. But state and local government should be doing its part by rolling back regulation that stifles entry into many fields while working to create local cultures that are supportive of self-employment and entrepreneurship. And as a nation we must continue to address the soaring cost of health care. A truly entrepreneurial economy won’t happen until we provide the ingredients it needs.