Thursday, October 2, 2014

Entrepreneurship in the U.S. and Utah

John Krantz, Research Economist

At the most basic level, entrepreneurship refers to the process of creating a new business or firm. From the economic point of view, it is seen as an important catalyst for beneficial change in the economy. The economist Joseph Schumpeter described entrepreneurs as innovators who introduce improved methods of production or superior products to the market. It is the energy of the entrepreneur that makes a free-market economic system flourish.

America has been well-known for its entrepreneurship, which thrives in part because of the ease with which a new business can be started. The U.S. Bureau of Labor Statistics (BLS) produces data under its Business Employment Dynamics (BED) program that gives insight into entrepreneurship’s impact on the labor market. Nationally, the BED data shows that the level of establishment births has grown at roughly the same rate as private employment, but the level of establishment births in Utah has not kept up with overall statewide employment growth. An additional insight provided by the data is that the employment gains from establishment births have been declining since the late 1990s, both nationally and in Utah.

The following graphs describe the births and deaths of establishments and the gains and losses in employment that resulted from those births and deaths. Entrepreneurship is best characterized as the creation of new firms that have never previously existed. Technically speaking, the birth of an establishment may be the result of an existing firm merely expanding by opening a new worksite in a different location, which may not comport with our notion of entrepreneurship. Nevertheless, the data shows that the births and deaths of new firms and new establishments tend to follow the same patterns. And because entrepreneurship births are a subset of establishment births, the data does reflect the size and impact of entrepreneurship on the labor market (see the article by BLS economist Akbar Sadeghi for a detailed discussion of the definitions).

At the national level, the level of establishment births has remained roughly proportional to the size of the labor market over the last 15 years. From 1998 to 2013, the level of births has increased by 8.4 percent, while total private-sector employment has increased 7.7 percent. In Utah, however, establishment births have only grown by 6.8 percent, even though total private-sector employment has grown by 25.7 percent.

Click graphs to enlarge
In 2013, the level of establishment births in the U.S. reached an historical high, but in Utah the level is roughly 18 percent below the peak achieved in 2006 (see Figures 1 and 2). The steep increase in establishment births in Utah during the 2000s was largely the result of the housing bubble, which generated many new construction and real estate establishments, and they tend to be small establishments. The subsequent recession produced a large decline in new establishment formation.  Yet, even taking into account the effects of recessions, the growth rate of establishment births appears low relative to the growth of the labor market.

One feature of entrepreneurship that has been changing, both nationally and in Utah, is the impact of new establishments on job creation.  In 1996, employment gains from establishment births accounted for only 1.2 percent of total private employment in the U.S. and 1.5 percent in Utah. Since then, the contribution to total private employment has weakened further. Job gains from new establishments amounted to only 0.7 percent of U.S. total private employment and only 0.8 percent in Utah (see Figures 3 and 4).

Click graphs to enlarge
If establishment births can be viewed as a good proxy for entrepreneurial activity, then the data suggest that fewer entrepreneurs are presently starting new businesses in Utah relative to the size of the labor market. Furthermore, the contribution of entrepreneurship in terms of employment gains from new establishments has steadily declined for the last 20 years in the U.S. and Utah. However, this should not be viewed as meaning that the overall impact of entrepreneurship to the broader economy has lessened. The data say nothing about the overall benefits to society from the innovations in the methods of production and the introduction of new products within existing establishments that arise from entrepreneurial activity. New firms today might have a larger impact through the introduction of inventions and innovations, on average, as compared to 20 years ago. At the same time, the data does suggest that entrepreneurial activities are contributing fewer jobs as a percent of total private employment today than several decades ago.

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