Does a Decrease in Entrepreneurial Activity Show That the Economy is Improving?

Over the last few years the Kauffman Index of Entrepreneurial Activity—which uses data from the US census and statistics from the Bureau of Labor to map out new businesses across the country—has shown a decreasing trend in start-up businesses. According to many economists, this might show that the job market is getting stronger.

Here are the statistics that the Kauffman Study found: In 2012, 300 adults per every 100,000 started new businesses. 2013 saw a slight drop to 280 adults for every 100,000 becoming new entrepreneurs. The study also showed that almost 80 percent of new small business owners had not been recently fired from a job. This suggests that individuals that are starting new businesses have already done so or are not doing so out of desperation. What this all means, suggest economists, is that the job market is improving so much that many people no longer are thinking of starting their own businesses in order to create home revenue.

This decrease in the creation of small businesses is good because the start-up market is not so crowded. This means that good companies may have a better chance at succeeding simply because people can find them easier instead of wading through a sea of similar companies. This also means that people in search of a certain service or product have less choices, so money will be spent with a few companies instead of being spread amongst many—which might mean that a higher percentage of new businesses will succeed. It is interesting to note that some experts believe that the reason for the drop in the creation of new small businesses is that start-ups from previous years have become successful and are now hiring.

Since the end of the Great Recession in 2009, the trend of new start-ups creation has been slowing; and although the correlation between a healthier job market and decrease in the creation of new small businesses is not perfect, it is something to note.

Engle, Jeff. “Kauffman Study: Weaker Entrepreneurship Spells Stronger Job Market” www.wconomy.com april 2014