Entrepreneurs are an integral part of a dynamic economy. Starting and running one's own business allows many people to better utilize their skills and talents, all while providing good jobs for hardworking Americans. Self-started small businesses provide households with the opportunity to take hold of their own economic security, strengthen their communities, and bolster the economy as a whole.
Entrepreneurship is a key driver towards a more prosperous economy. Yet, entrepreneurship has been stagnant overall and declining among younger households.
Entrepreneurship, though, has been expanding among older households -- those 50 years old and older -- especially since the late 1990s. In a recent report for the Center for American Progress, my colleagues and I show that the share of older households who owned and managed a small business that was worth at least $5,000 (in 2013 dollars) grew from 8.68 percent in 1998 and to 9.8 percent in 2013.
Entrepreneurship has been thriving among older households, even while it has been declining among younger ones. This rise in entrepreneurship among older households is substantial. After all, Americans are getting older and entrepreneurship has been growing even faster than this aging population. Moreover, entrepreneurship has been growing faster than other employment options, such as wage and salary employment and independent contracting.
Two story lines exist to explain the growth of older entrepreneurship, especially after the late 1990s. The first is that older workers have increasingly been caught in a bind. By the early 2000s, well-paying jobs with good benefits were harder to come by. Thus, older workers saved more and were pushed into self-employment. The recession of 2001 in fact marks a clear break for entrepreneurship among older households, which could support this storyline. Entrepreneurship was much higher after 2000 than before. At the same time, other labor market indicators such as length of unemployment and wage growth showed that wage and salary employment became much less secure.
Alternatively, the other explanation is that some older households saw especially large gains in their savings as a result of the stock market run up of the 1980s and 1990s and the burgeoning housing market that started in the mid-1990s. These households could now be pulled into entrepreneurship because significant gains in wealth made it easier to face the risks associated with entrepreneurship.
In our report, my co-authors and I considered nationally representative data on household finances to see which one of these two story lines was more plausible. The bottom line is that no evidence suggests that labor market pressures--a weak labor market and a growing need to save more for retirement--pushed older households into entrepreneurship.
Rather, the data shows that older entrepreneurship grew alongside two factors: household savings and capital income. Older entrepreneurs increasingly relied on their own savings for collateral for their business and they also received more capital income--capital gains, dividends, and interest payments--than was the case for non-entrepreneurs. Older entrepreneurs had a safety cushion to rely on that allowed them to take business risks, which younger households and non-entrepreneurs typically did not have.
But the chance to use their own savings for a business was increasingly concentrated among a particular group of older households: White, married, and high-income households saw much larger wealth gains from 1998 forward than was the case for all other older households. Not surprisingly, close to 90 percent of older entrepreneurs are white, more than 80 percent are married, and about half of all older entrepreneurs have incomes that put them in the top fifth of the income distribution. Communities of color, single women, and lower-income households are significantly underrepresented among older entrepreneurs.
This research suggests two productive venues for policy that can create more entrepreneurship opportunities for underrepresented household groups. First, policymakers can make it easier for many households to save and to use those savings for a new or existing business venture. But a second and likely more expeditious solution is for policymakers to give older households who want to start and grow a small business access to a safe stream of income beyond programs such as Social Security or the Unemployment Insurance system. For example, many researchers already think that the Affordable Care Act, also known as Obamacare, will boost entrepreneurship by providing a safety net. Access to cash income should have an even larger impact on entrepreneurs than health insurance since households can use cash in more flexible ways, such as for their business or to pay their own bills.
America is a country full of people with great business ideas and the drive to make these ideas a reality. Everybody should have the chance to bring their ideas to fruition and policymakers can quickly create many such opportunities.