Anyone concerned about the importance of entrepreneurship for the American economy should also be concerned about the strength of the nation’s middle class. Research shows that the majority of American entrepreneurs come from middle-class families.
According to the Center for American Progress, new research shows that from 2002 to 2008, the percentage of business-owner households dropped so considerably that the U.S. economy had 1 million fewer entrepreneurs than it would have had if it had kept pace from the 1990s. In the 2000s—as the middle class faced increased pressures and the nation experienced rising inequality—fewer people took the leap to become entrepreneurs, and more entrepreneurs closed down shop for other forms of employment.
A new CAP report from World Bank economist Mondragón-Vélez analyzes the factors that affected entrepreneurship through 2011 in How Does Middle-Class Financial Health Affect Entrepreneurship in America? He finds that the difficulty middle-class families experienced in financing new business ventures constrained entrepreneurship to older, higher-educated, higher-wealth households. Thus, he warns of “entrepreneurship [becoming] a viable option only for those with higher income and wealth levels.”
Business creation rates stalled from 2002 to 2008, while business failure rates increased. Mondragón-Vélez writes, “As middle-class families’ incomes stagnated, the average percentage of business- owner households dropped to 12.4% from 2002 to 2008 and again to 11.8% in 2010.”
In the 1980s and 1990s, “new business owners only had 1.7 to 2 times more wealth than their median-wage worker peers.” By the 2000s, this number had jumped to two to three times more wealth.” As Mondragón-Vélez further notes, “limited wealth accumulation capacity has been gradually making entrepreneurship in America a luxury type of good, mainly available to individuals with high incomes and a high net worth.”
Entrepreneurship is a key driver of U.S. economic growth and leadership in the world economy, and economic research shows that the middle class plays a central role in it. It is also evident that a vast swathe of U.S. society has felt a tightening financial squeeze over the past several decades, reports CAP. But what is truly striking, and what should give both policymakers and venture capitalists pause, is that these 1 million entrepreneurs—representing more than the population of San Francisco or Boston—were missing even before the full effects of the Great Recession hit, according to the report. In the wake of the recession, the percentage of business-owned households dropped even further.
What’s more, the new data reveals that entrepreneurs are now waiting longer before starting a venture. New entrepreneurs in the 2000s waited an average of seven years longer than new entrepreneurs in the 1980s to start their own businesses. The median age of a new business-owned household jumped from 38-years-old in the 1980s to 45-years-old in the 2000s.
Given that middle-class families account for 60% of new business ventures, “their increasing financial stress partly explains the stagnation of business-creation rates in the 2000s compared to the late 1990s,” further adds Mondragón-Vélez.