By Jennifer Erickson & Adam Hersh
June 18, 2015 at 5:00 am ET
Mondragón-Vélez’s analysis, released by the Center for American Progress, should give pause to policymakers. Entrepreneurs, the people that breathe dynamism and innovation into our economy, are fading away. So where are all the entrepreneurs going? More are exiting their existing business—folding or choosing different options for work—and the pace of new entrants has been insufficient to replace the numbers leaving entrepreneurship.
Why? Look no further than the enormous economic squeeze plaguing the middle class. Just as a strong and growing middle class is essential to building a strong and growing economy, a strong middle class helps incubate a robust and diverse entrepreneurial community. While entrepreneurship in the early 2000s stayed robust amongst those with high incomes, Mondragon-Velez’s analysis shows that entrepreneurship in upper middle-class households increased in the late 1990s, but fell back again in the 2000s to their level at the beginning of the 1980s.
Perhaps this should not be surprising. As the costs of basic pillars of middle class security – such as child care, higher education, health care, housing, and retirement – have risen in recent decades, wages have stagnated, squeezing many people so tightly as to stifle entrepreneurial opportunities.
The connections between the financial health of the middle class and the ability to start a new business can be seen clearly in things such as who can access capital for investment. For example, a significant proportion of small-business owners use home equity to finance their business. Since households lost huge amounts of home equity in the financial crisis, this has implications for many households’ capacity to start a new venture, especially when venture capital and angel investors overall appear to have become more risk averse to early stage businesses.
We should also expect crippling student loan debt to pose adverse effects on individuals’ ability to accumulate the capital needed to start a new business. Over the last several decades, American’s student loan debt has skyrocketed, now topping $1.3 trillion. This is one factor behind Mondragón-Vélez’s finding that the median age of a new business-owned household rose significantly older over the last generation: In the 2010, the median new entrepreneur was 45 years old, compared to 38 years on average in the 1980s.
Mondragón-Vélez warns that entrepreneurship in America might be becoming “a luxury type of good, mainly available to individuals with high incomes and high net worth.” In fact, his research shows that there was a wider wealth gap between new business owners and their median worker peers in the 2000s than in the 1980s and 1990s.
From Henry Ford to Steve Jobs, we have counted on a pipeline of middle-class entrepreneurs to build new businesses and entire new industries. According to Panel Study of Income Dynamics data, 60 percent of entrepreneurs come from the middle class. Research from the Kauffman Foundation suggests that number could be even higher. If that pipeline is choked off, then the loss of would-be entrepreneurs will pose problems for our economy more broadly.
Although we know that entrepreneurship in America is slowing, we recognize that the decision to become an entrepreneur involves many factors, including an individual’s tolerance for risk taking and what we might call their entrepreneurial verve. And as more information is collected following the Great Recession, the picture will come into clearer focus. But if we are to revitalize America’s entrepreneurial community, we must help relieve the middle-class squeeze so that more individuals are free to pursue new business ventures.
We know that by focusing on policies that raise workers’ wages and reduce rising costs for key elements of middle-class security, we can rebuild America’s middle class.
We can also do much more to welcome new entrepreneurs to the United States, appreciating that new Americans have always been an essential part of our entrepreneurship success story. President Obama’s recent administrative actions to break the logjams in our immigration system will make it easier for more aspiring Americans to come here to start a business. Congress must also catch up to the American people and enact comprehensive immigration reform that will help further unlock a trove of economic potential.
The loss of one million American entrepreneurs is a sobering reminder that now is the time to adopt policies that strengthen the middle class to ensure that we don’t lose one million more.
Jennifer Erickson is the Director of Competitiveness and Economic Growth and the Center for American Progress. Adam Hersh is a Senior Economist at the Roosevelt Institute and Visiting Scholar at Columbia University’s Initiative for Policy Dialogue.