Analysis: Economist links faltering middle class to lack of new businesses

Published May 21, 2015

WASHINGTON — At the start of the 1970s, about 3 percent of U.S. households started a business every year. By the end of the '80s, that rate had increased by a third. By the end of the '90s, it had risen again, by almost a fifth, and stood near 5 percent.

Then, abruptly, the growth stalled — and after the Great Recession, the rate fell. If the trends of the previous 30 years had continued, the nation would have seen 1 million more entrepreneurs over the past decade than it actually did. For some reason, it did not.

That reason, an economist for the World Bank postulates in a new research paper, is wrapped up with the faltering health of America's middle class in the 2000s. Camilo Mondragón-Vélez, a senior research officer at the World Bank Group's International Finance Corp., analyzed two long-running data sets and calculated the 1 million missing entrepreneurs figure. He traces it largely to families earning between $41,000 and $151,000 in today's dollars (a very broad definition of middle class, it should be noted), who constitute 60 percent of all business-owning households, but who flatlined on their rates of new business ownership after decades of growth.

The wealthiest families, in contrast, kept increasing their rates until the recession.

The analysis, released by the Center for American Progress, a liberal think tank — and which is not an official position of the World Bank in any way — finds that it now takes would-be entrepreneurs more time, more income and more education to start a business, compared with previous decades. The average new business owner was 47 years old in 2010, up from 41 in 1970. About two-thirds of those new owners had at least some college education in the 2000s, up from three-fifths in the '90s.

The median wealth of a family that was about to start a business was three times as much in 2009 as a family that wasn't about to start a business. That's up from twice as much in the '90s.

Those trends, Mondragón-Vélez notes, happen to coincide with a period of middle-class income stagnation and widening gaps between the wealthiest Americans and everyone else. He overlays those trends and speculates that "limited wealth accumulation capacity has been gradually making entrepreneurship in America a luxury type of good."

There is plenty of evidence that declining entrepreneurship is hurting middle-class Americans. Mondragón-Vélez is arguing that the reverse is also true: that the weakening of the middle class is eroding new business growth.

The paper also raises questions that Mondragón-Vélez does not really attempt to answer, but which could have broad implications for policymakers. Most notably, he finds that while new business creation stalled in the 2000s, the failure rates of existing businesses increased. It's reasonable to ask why that is — whether increased government regulation, crimped access to credit, growing power for incumbent firms — or something else — is pushing more businesses to extinction.

"Maybe now the environment has become more competitive," he said. "Maybe it's getting riskier to start a small business."

And maybe that risk, whatever its cause, is getting harder for middle-class Americans to bear.