Increased Economic Pressures, Rising Inequality at Heart of Sagging Middle-Class Entrepreneurial Economy
Washington, D.C. — New research released today by the Center for American Progress finds that 1 million business-owner households went missing in the years prior to the Great Recession, compared with levels of entrepreneurship in the 1990s. In addition to fewer Americans taking the jump to become entrepreneurs, more entrepreneurs shut down their businesses, signaling that the drop in entrepreneurship arrived as the middle class faced increased economic pressures and the nation experienced rising inequality.
CAP commissioned World Bank economist Camilo Mondragón-Vélez to investigate the intersection of middle-class financial health and the state of entrepreneurship in the United States, an area of research that economists have, to date, generally underexamined. Mondragón-Vélez analyzed Panel Study of Income Dynamics data and discovered that the difficulty middle-class families experienced in financing new business ventures constrained entrepreneurship to older, higher-educated, higher-wealth households.
The financial stress and strain of flat incomes for the American middle class during the 2000s further reveal the wider wealth gap between new business owners and their median-wage worker peers. By the 2000s, new business owners had two to three times more wealth than their worker peers, CAP’s analysis found, compared with 1.7 times to 2 times the wealth in the 1980s and 1990s. In the 2000s, new entrepreneurs also were waiting longer before starting a venture. Mondragón-Vélez’s research found that business owners were, on average, seven years older than their peers from the 1980s.
“The Great Recession’s impact on the economy has been discussed at length, but the slide of middle-class entrepreneurship in the years immediately preceding the crash has not yet been examined in great detail,” said Mondragón-Vélez. “What is now clear is that increased financial stress and wealth inequality faced by middle-class families has hurt the American entrepreneurial economy, depriving us of a source of dynamism and job creation.”
To accompany Mondragón-Vélez’s research, Jennifer Erickson, CAP Director of Competitiveness and Economic Growth, and Adam Hersh, formerly a Senior Economist at the Center, co-authored an issue brief that offers recommendations that will help strengthen the middle class and support entrepreneurship. These recommendations include expanding access to capital, removing financial barriers to a high-quality higher education, fixing the immigration system, and reinvesting in science and technology research and development at the federal level.
“This new analysis is sobering reading for people who care about the state of entrepreneurship in the U.S. economy. We cannot replay the first decade of the 20th century, so the most important question now is what policymakers can do to reverse the loss of those 1 million entrepreneurs and set the stage for entrepreneurial success going forward. Improving access to capital and higher education, fixing our broken immigration system, and investing in research and development will all help achieve this goal,” said Erickson. “A healthy middle class means a healthy entrepreneurial economy.”
The report follows another CAP analysis, “The Middle Class Squeeze,” that found that for an example median-income married couple with two children, the collective cost of middle-class security—including health care, child care, higher education, and housing—rose by an estimated $10,600 between 2000 and 2012, while that family’s income was stagnant.
Click here to read “How Does Middle-Class Financial Health Affect Entrepreneurship in America?” by Camilo Mondragón-Vélez.
Click here to read the accompanying issue brief, “1 Million Missing Entrepreneurs” by Jennifer Erickson and Adam Hersh.
For more information on this topic or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.