Federal Policies In Response To Declining Entrepreneurship

from the Congressional Budget Office

Entrepreneurship is beneficial to the economy in many ways. Policymakers may therefore be concerned about its continued decline over the past four decades and the implications for economic growth. In this report, the Congressional Budget Office examines the falloff in entrepreneurship, its potential economic consequences, factors that have contributed to it, and ways that federal policies could be changed to reverse the trend.

How Much Has Entrepreneurship Declined Since the 1980s?

Several measures of entrepreneurship have declined since the early 1980s. The rate at which new businesses formed decreased from 10 percent of all firms that existed in 1982 to 8 percent in 2018. New firms (defined here as those less than five years old with at least one employee on the payroll) constituted 38 percent of all businesses in 1982 but were only 29 percent of them in 2018. During that period, new firms’ share of employment fell by a third, from 14 percent to 9 percent. The decline in new firms’ share of employment was fairly consistent in both the retail and services sectors throughout the period, whereas the share of employment attributed to new businesses in the information and high-tech sectors rose in the 1990s, falling thereafter. Although an early indicator of entrepreneurship - applications for an employer identification number submitted by likely employers to the Internal Revenue Service - dropped precipitously after the start of the 2020 coronavirus pandemic, it subsequently rebounded strongly.

How Has the Decline in Entrepreneurship Affected Productivity Growth?

Entrepreneurship plays an important role in allocating resources more efficiently throughout the economy, thereby making it more productive. Innovative new firms can be a source of technological change, often introducing new products and services. New companies can also increase the productivity of workers by improving methods of production, and they can bring competitive discipline to markets, forcing other companies to become more efficient to maintain business. Even the potential for new firms to enter a market can influence the behavior of existing firms.

The decline in entrepreneurship over roughly the past 40 years appears to have had a moderate impact on the overall growth of productivity. In particular, the decline was related to a falloff in labor productivity of at least 3 percent to 4 percent by the mid-2010s, in CBO’s assessment, compared with what it would have been otherwise. In the 1990s, new firms in the information and high-tech sectors supplied products that were useful to a wide range of industries, and the growth of those firms was accompanied by greater productivity growth in the economy. When the growth of new businesses in those sectors later declined, so did the growth rate of productivity.

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