The Impact of Hard Times on Entrepreneurs

By George Erickcek, W.E. Upjohn Institute for Employment Research (Originally posted April 11, 2011 on the Upjohn Institute blog)

Researchers are in conflict, once again, over the importance of small businesses in creating jobs. The current debate centers on whether small businesses weathered the Great Recession (2007 to 2009) better than larger establishments.

As recently summarized in an article by Kevin L. Kliesen and Julia S. Maués at the St. Louis Federal Reserve, the debate about the importance of small establishments in creating jobs started back in 1979 when David Birch claimed that small establishments employing fewer than 20 employees generated 2/3 of all jobs. Birch’s work generated numerous papers which both fine-tuned and lowered his original findings.  The general conclusion reached was that small establishments generate a lot of jobs; however, many die after a couple of years, so their net employment impact is much smaller.

Kliesen and Maués concluded that from 1992 to 2010, small establishments employing fewer than 20 workers created 16 percent of all net jobs during the period. Additionally, if the 2007 to 2009 recession is removed from the sample, small establishments account for 28 percent of all net jobs being created. In other words, hard times hit small establishments particularly hard.

These findings countered those of the Kauffman Foundation, which reported that entrepreneurial activity hit a 14-year high in 2009. Scott Shane’s research at Cleveland Federal Reserve found that the Kauffman Foundation findings were correct in that the number of persons going into self-employment rose sharply in 2009; however, a greater number of existing self-employed individuals closed their businesses. The number of unincorporated self-employed persons dropped from 10.2 million people in November 2007 to 9.8 million people in June 2009. 

Perhaps recessions generate what I call “accidental entrepreneurs,” or persons who open their own businesses because they have lost their previous employment.  Some of these persons may become very successful and, in fact, benefit from that push out into the dynamic world of entrepreneurship.  Nevertheless, hard times are simply hard times for all businesses, large and small.

George Erickcek can be reached at Erickcek@upjohn.org.