Entrepreneurial Activity Declines as Jobs Rise in 2012, According to Kauffman Report

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Improving labor market could be cause of drop in total new business creation rate in 2012. Interactive data of annual entrepreneurial activity nationally, by state and select MSAs since 1996 is available at http://www.kauffman.org/kiea

As the unemployment rate fell in 2012, another economic indicator dropped too: the overall business creation rate. According to the annual Kauffman Index of Entrepreneurial Activity released today, the 2012 rate declined slightly from 0.32 percent of American adults per month starting businesses in 2011 to 0.30 percent in 2012. That translates to approximately 514,000 new business owners per month in 2012 compared to 543,000 the year before. The 2012 business creation rate is slightly higher than pre-recessionary and long-term levels.

“It’s likely not a coincidence that the number of new businesses created dropped when the economy improved last year. While a stronger economy is good for business growth, it also means the unemployed find jobs instead of starting firms,” said Dane Stangler, director of research at the Ewing Marion Kauffman Foundation, which conducts the annual study. “During the Great Recession when the labor market was at its weakest, business creation rates rose to record highs. The 2012 rates are a return to longer-term levels.”

The Kauffman Index of Entrepreneurial Activity is a leading indicator of new business creation in the United States. It provides the only national measure of business creation by specific demographic groups. The 2012 data allow for an update to annual reports dating back to 1996. Interactive data spanning all 16 years is available at http://www.kauffman.org/kiea.

The overall decline in business creation rates was entirely driven by a significant decline in rates among men, from 0.42 percent in 2011 to 0.38 percent in 2012. Entrepreneurial activity remained unchanged in 2012 for women at 0.23 percent, though men still held a substantially higher rate than women.

Entrepreneurship rates for all races and ethnicities declined from 2011 to 2012. The Latino business-creation rate declined from 0.52 percent in 2011 to 0.40 percent in 2012, but remained at a high level relative to previous years and other demographic groups. The Asian entrepreneurial activity rate decreased slightly from 0.32 percent in 2011 to 0.31 percent in 2012.

The youngest age group (ages 20–34) experienced a large decrease in business creation rates, dropping from 0.27 percent in 2011 to 0.23 percent in 2012. The 45–54 age group also experienced declining rates from 2011 to 2012. From 2011 to 2012, both the 35–44 and 55–64 age groups experienced slight increases in rates.

“Examining entrepreneurial activity rates by demographics can point us to inefficiencies or changes in the economy,” said Robert W. Fairlie, the study’s author and director of graduate programs in Economics at the University of California, Santa Cruz. “The fact that the rate for men starting businesses dropped so significantly in 2012, when unemployment also went down, suggests that men were getting jobs so they didn’t feel the pressure to start businesses as a last resort.”

Geographically, entrepreneurial activity rates decreased in all U.S. regions. Rates remain highest in the West and lowest in the Midwest. Among states, Montana had the highest entrepreneurial activity rate, with 530 per 100,000 adults creating businesses each month during 2011. Rounding out the top five highest rates were Vermont (520 per 100,000 adults), New Mexico (520 per 100,000 adults), Alaska (430 per 100,000 adults), and Mississippi (430 per 100,000 adults). The states with the lowest rates of entrepreneurial activity were Minnesota (150 per 100,000 adults), Nebraska (170 per 100,000 adults), Michigan (180 per 100,000 adults), Wisconsin (180 per 100,000 adults), and Ohio (190 per 100,000 adults).

For the first time in this series, entrepreneurship rates are reported by veteran status. In 2012, the business creation rate was 0.28 percent for veterans, a decline from 0.30 percent in 2011. The non-veteran entrepreneurship rate was 0.30 percent. Over the last seventeen years, veteran entrepreneurship rates generally have been higher than non-veteran entrepreneurship rates. Over the past four years, however, veteran rates have been lower. The share of all new entrepreneurs represented by veterans was 12.3 percent in 1996 but has steadily decreased to 5.7 percent by 2012. This is due to the decline in the Korean and Vietnam War veteran share of the working-age population over the past seventeen years.

The complete report plus interactive data of annual entrepreneurial activity nationally, by state and select MSAs since 1996 is available at http://www.kauffman.org/kiea.

Follow the conversation on Twitter at #KIEA.

About the Kauffman Index of Entrepreneurial Activity
Capturing new founders in their first month of significant business activity, the Kauffman Index of Entrepreneurial Activity provides the earliest documentation of new business establishment across the country. The percentage of the adult, non-business-owner population that starts a business each month is measured using data from the monthly Current Population Survey (CPS), conducted by the U.S. Bureau of the Census and the Bureau of Labor Statistics. In addition to this overall rate of entrepreneurial activity, the Kauffman Index presents separate estimates for specific demographic groups, states and select metropolitan statistical areas (MSAs).

About the Kauffman Foundation
The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that aims to foster economic independence by advancing educational achievement and entrepreneurial success. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo., and has approximately $2 billion in assets. For more information, visit http://www.kauffman.org, and follow the Foundation on http://www.twitter.com/kauffmanfdn and http://www.facebook.com/kauffmanfdn.

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