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November 21 2016

U.S. Small Businesses: Good News and Bad News

Patrice L. Onwuka

This Saturday is Small Business Saturday. After recovering from Thursday’s turkey coma and Black-Friday shopping madness, Americans are implored to shop at local small businesses to show support for small retailers.

Small business is the backbone of the American economy and we have some good news, although it comes with a big caveat.

For the first time, entrepreneurial activity is higher than it was before the recession. Small businesses are staying open longer. The caveat is that headcounts are not growing. In fact, they’ve gotten smaller over the past two decades.

The E.M. Kauffman Foundation released its annual Index of Main Street Entrepreneurship, which finds that business survival rates reached a three-decade high of 48.7 percent—meaning that almost half of new businesses are making it to their fifth birthdays. Overall ownership rates though are down and have yet to recover

The number of companies with up to four employees has also ticked upward to comprise more than half (53 percent) of established companies. Two years ago, just under half (49.5 percent) fell into that category.

Staying around longer may not mean that society is benefiting from the best products and services though as they explain:

"The Main Street Entrepreneurship Index provides additional evidence that U.S. small business activity has rebounded from the downturn and continues to gather strength," said Arnobio Morelix, senior research analyst at the Kauffman Foundation. "More new businesses are making it through their first five years of operation. While this could indicate that a lack of dynamism is allowing less-productive firms to hang on longer, overall the entrepreneurial increases bode well for the established, small businesses that underpin much of our economy.”

Women make up half of the 8 percent of adults who own U.S. businesses. At about 4 percent of the population, the number of women businesses owners has changed little over the past two decades. Immigrant communities and Latinos seem to be driving the growing share of business owners.

An eye-opening demographic trend is business ownership by education level. As the Wall Street Journal reports, the levels are converging:

… the rate of business ownership among those with less than a high school degree rose to 5.7% from 5.4% two decades earlier, while the rate for those with a college degree fell to 7.4% from 11.2%.

The report doesn’t explain why businesses aren’t growing in headcount or the demographic changes. We can surmise, though, that public policy plays a role. Out-of-work Americans make great candidates for entrepreneurs. However, once in business and making money, they face employment regulations among the host of other rules they must comply with. From new overtime rules to ObamaCare mandates to minimum wage increases, it’s increasingly more expensive to hire workers. It may be that small businesses are turning to consultants or out-sourced workers to provide for their needs. They carry no overhead and allow employees to focus on the core business. This could be good and bad.

We need small businesses to continue to grow and that will require common-sense approaches to economic policy that free the entrepreneur and untangle them from unnecessary, burdensome regulations.

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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