Entrepreneurship is waning, in Massachusetts and around the country. Despite widespread talk of disruptive young companies and startup incubators, the US economy is becoming dominated by old firms, while startup rates have yet to recover from the Great Recession.
Instead of hungry new businesses, Massachusetts is instead seeing an uptick in pseudo-businesses like independent contractors, Uber drivers, and freelance consultants. Think of them as BINOs — businesses in name only — not because they are necessarily bad, but because they are unlikely to ever hire, pay wages, or generate the kind of economic dynamism usually associated with new firms.
Exclude these BINOs and what you see is a long-term shortfall in the creation of what we might call employer-businesses —
the growth-seeking type that is more likely to hire employees and expand over time.
In recent years, Massachusetts has been generating just under 6,000 employer-businesses per quarter, compared with 6,700 during the peak years before the recession, according to a novel dataset recently released by the Census Bureau. That adds up to a roughly 12 percent dip, which is actually not bad, compared with the 20 percent drop for the country as a whole.
While there was a time when this falloff in startups could be attributed to struggling regions or sluggish sectors, that’s no longer the case. Nationwide, 48 of the 50 states are spawning fewer employer-businesses today than they were before the recession. It isn’t just the loss of mom-and-pop retail shops in a Walmart-ized world; you find the same pattern in manufacturing, construction, and the entire services sector.
As harbingers of the future go, this isn’t particularly cheering. Young firms have historically been engines of job creation and productivity. In fact, the widespread notion that small businesses create the majority of new jobs masks the truth that this work is done by young small business — and that the young part is more important than the small.
Indeed, the fact that young firms are popping up less frequently could help explain why our recovery has been so slow, requiring eight years to dig out of its recessionary hole without yet reaching the 4 to 5 percent growth rates achieved after prior recessions.
And if you’re hoping for a quick fix, unfortunately, no one even knows why this is happening.
Demographics are one possibility. Middle age seems to be the most likely time in life for people to start businesses, with the average age of founders hovering around 40. So it’s possible that the decline in business formation merely reflects the fact that baby boomers have been steadily passing out of middle age and into their golden years.
But it’s not clear how much weight this theory can bear — researchers at the Brookings Institution tried to pin down this demographic link and found only weak evidence to support it.
A more likely culprit is market consolidation, which is leaving more US industries dominated by a handful of powerful players. It’s not just CVS and Walgreens, or Comcast and Time Warner, either — the top four manufacturing companies control 43 percent of US sales; the top four finance firms nearly 35 percent; and the top four retail trade firms account for 30 percent.
With so many big, entrenched businesses around, new entrants may find it harder to get a foothold. Especially when those firms manage to lock in their market advantage through patents, lobbying power, and other anti-competitive barriers. Facing such daunting adversaries, some would-be entrepreneurs may decide not to try — even when they have genuinely innovative ideas.
If you’re looking for a less alarming explanation, it’s possible the data we have are actually exaggerating the issue. Most of the information about the long-term trend comes from a Census Bureau survey that dates to the late 1970s, and there’s at least some reason to think those years were a blip with an unusually high number of new businesses being formed. Judged against that exceptional beginning, the trend was bound to trip downward. Though now that we have a corroborating set of data for more recent years — based on applications for employer identification numbers — this “maybe it’s a statistical artifact” explanation has lost some of its power.
Most likely, Americans really are starting fewer businesses than they used to —
and opting for more BINOs. Which projects a dark shadow onto our otherwise bright economic landscape. Unemployment may be low, and overall GDP growth improving, but the real key to future prosperity is innovation, which has traditionally come from hungry new businesses.
Where will it come from now?
Evan Horowitz digs through datato find information that illuminates the policy issues facing Massachusetts and the nation. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz.