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The decline of American entrepreneurship — in five charts

By many accounts, the American economy is roaring back. Hiring is accelerating, wages are rising and the labor force is growing. Confidence among business leaders regarding the year ahead is on the rise, too.

In one area, though, the economy seems to be in serious trouble – and that’s entrepreneurship.

“It all feels pretty good,” Mark Zandi, chief economist at Moody’s Analytics, said during an event Wednesday in Washington. “But I think there are things to be worried about, and the state of entrepreneurship is one of those things.”

New research shows that the country’s rate of new business creation, which peaked about decade ago, plunged more than 30 percent during the economic collapse and has been slow to bounce back following the recession. And that’s despite the fact that, over the last few years, the portion of the U.S. population between the ages of 25 and 55 – historically the prime years for starting a business – has been expanding, according to data compiled by the Kauffman Foundation, an entrepreneurship research organization that hosted the event  – the group’s annual State of Entrepreneurship symposium – on Wednesday.

Not surprisingly, fewer new businesses means fewer new jobs. Zandi cited Labor Department statistics showing that companies less than one year old contributed 5.2 million jobs in the year ending June 2014, down from the usual 6 million or so they generated in the years leading up to the recession and well off the normal pace of 7 million to 7.5 million jobs a year seen in the 1990’s.

“We’re getting less bang from our fast-growing companies,” said Wendy Guillies, Kauffman’s acting president. Echoing Zandi, she added: “I know the headlines look good, but when you dig a little deeper, something’s not quite right.”

It gets worse. While the rate of business formation has slowed, the pace of business closures, which had held steady over the previous decade, started to ascend in 2005 and spiked in 2008, according to data compiled by the Brookings Institute. Consequently, business deaths now outpace business births for the first time since researchers started collecting the data in the late 1970’s.

The result, as shown below, is that long-established companies represent an increasingly large share of U.S. firms, with those that have been in business for more than five years now accounting for more than two-thirds of companies. Meanwhile, the proportion of companies of every age from one to five years old has shrunk over the past 35 years.

That wouldn’t necessarily be a problem, except that previous research has shown that young businesses account for nearly all net new jobs (job gains minus job losses) created annually in the United States. Older businesses, by comparison, tend to collectively shed from their payrolls almost as many workers as they add.

In addition, new companies tend to continue adding jobs even during economic downturns, while hiring by established businesses has historically ebbed and flowed with the growth and decline of the economy.

Question is, who can help turn all this around? Millennials, Kauffman researchers suggest, have the best shot at leading an entrepreneurial recovery, as they grew up in the digital age, have had more exposure to entrepreneurship and have higher levels of education than previous generations. By 2020, they will also represent the largest age segment of the U.S. population.

Here’s the problem: they aren’t starting businesses. In fact, the rate of business formation by Americans ages 20 to 34 has fallen sharply since 2010, and millennials aren’t starting nearly as many new enterprises today as baby boomers were creating when they were the same age.

Kauffman researchers argue in their report that the recession has “dealt a permanent blow to Millennials’ entrepreneurial potential.” In part, that’s because home ownership among millennials – traditionally a prime source of savings and potential loan collateral – plummeted during the downturn. Others may be deterred from taking the entrepreneurship plunge in light of the soft labor market and the fear of not finding work should their company ultimately fail.

Obtaining all those upper-level degrees didn’t come cheap, either. The ever-growing mountain of student debt has left many young adults without the savings they might have had to put toward a business venture.

“Many [millennials] are starting their careers from a negative financial position, and the burden of student debt certainly isn’t helping,” Guillies said.

Zandi and Guillies urged Washington’s elected leaders to turn more attention to the decline in entrepreneurship and pursue policies that encourage more Americans of all ages and backgrounds to think seriously about starting new businesses.

“Unless this changes, unless we do see more entrepreneurship, the kind of economic growth we’re seeing now will not continue,” Zandi said.

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