Kauffman Index of Entrepreneurial Activity, 1996-2013

Abstract

The Kauffman Index of Entrepreneurial Activity is a leading indicator of new business creation in the United States. Capturing new business owners in their first month of significant business activity, this measure provides the earliest documentation of new business development across the country. The percentage of the adult, non-business-owner population that starts a business each month is measured using data from the Current Population Survey (CPS). The Index captures all types of business activity and is based on nationally-representative sample sizes of more than a half-million observations each year. In addition to this overall rate of entrepreneurial activity, separate estimates for specific demographic groups, states, and select metropolitan statistical areas (MSAs) are presented. The Index provides the only national measure of the rate of business creation by specific population groups.

New 2013 data allow for an update to previous reports, with consideration of trends in the entrepreneurial activity rates over the eighteen-year period between 1996 and 2013. The Kauffman Index reveals important shifts in the national level of entrepreneurial activity and shifts in the demographic and geographic composition of new entrepreneurs across the country. Also, new for 2013 is the reporting of trends in the share of entrepreneurial activity coming from new entrepreneurs who are not coming directly out of unemployment. The new estimates provide suggestive evidence on trends in “opportunity” business creation relative to unemployment-related (“necessity”) business creation over the business cycle. For only the second year, estimates also are reported for veterans, representing some of the first evidence on business creation for this group.

This report presents rates of entrepreneurial activity for each demographic group (e.g. male, female, immigrant, native-born, etc.), but in some cases the share of all new entrepreneurs represented by each demographic group also is presented. The former represents the overall entrepreneurial rate for each subgroup, whereas the latter represents the proportional representation of the individual subgroup to the total number of new entrepreneurs. For example, the rate of entrepreneurial activity for immigrants has always exceeded the rate for the native-born. This does not indicate that there are more immigrant entrepreneurs than native-born entrepreneurs, however, because the native-born population is substantially larger than the immigrant population. Key findings for 2013 include:

• The rate of business creation declined from 300 out of 100,000 adults in 2012 to 280 out of 100,000 adults in 2013. The business creation of 0.28 percent translates into approximately 476,000 new business owners each month during the year.

• The decline in the business creation rate to 0.28 percent in 2013 is important because this rate finally returns levels of business creation to levels found prior to the Great Recession.

• The decline in business creation over the past year is likely due to improved labor market conditions, putting less pressure on individuals to start businesses out of necessity. Trends in the share of business starts, presented in this report for the first time, indicate that the share of new entrepreneurs who are not coming directly out of unemployment was much higher in 2013 than the share at the end of the Great Recession.

• The rate of employer business creation increased slightly from levels prior to the Great Recession.

• The overall decline in business creation rates was due mainly to a drop in business creation rates among men, but also was due to a slight drop in rates among women.

• The entrepreneurial activity rate decreased for all racial and ethnic groups. The rate decreased from 0.21 percent in 2012 to 0.19 percent in 2013 for African-Americans, from 0.40 percent in 2012 to 0.38 percent in 2013 for Latinos, from 0.31 percent in 2012 to 0.28 percent in 2013 for Asians, and from 0.29 percent in 2012 to 0.27 percent in 2013 for whites.

• Immigrants were nearly twice as likely to start businesses each month as were the native-born in 2013. The immigrant rate of entrepreneurial activity decreased from 0.49 percent in 2012 to 0.43 percent in 2013.

• All age groups experienced declines in entrepreneurial activity from 2012 to 2013, except for the ages forty-five to fifty-four group, which experienced an increase.

• Over the past eighteen years, Latinos, Asians, and immigrants experienced rising shares of all new entrepreneurs, mainly because of increasing populations, but also because of rising rates of entrepreneurship. The oldest age group (ages fifty-five to sixty-four) also experienced a rising share of all new entrepreneurs primarily because it represents an increasing share of the population.

• Entrepreneurship rates declined for all education groups, except for college graduates who experienced constant rates from 2012 to 2013. The least educated have the highest rate of business creation, which might be due to more limited labor market opportunities than for more highly educated groups.

• Relatively new estimates of entrepreneurial activity for veterans indicate that business creation for veterans declined from 0.28 percent in 2012 to 0.23 percent in 2013. The share of all businesses created by veterans declined sharply over the past eighteen years as the working-age veteran population declined over this period.

• The construction industry had the highest rate of entrepreneurial activity of all major industry groups in 2013 (1.27 percent). The second-highest rate of entrepreneurial activity was in the services industry (0.37 percent).

• From 2012 to 2013, entrepreneurial activity rates decreased in all regions in the United States. Entrepreneurship rates are highest in the West and lowest in the Midwest.

• The states with the highest entrepreneurial activity rates were Montana (610 per 100,000 adults), Alaska (470 per 100,000 adults), South Dakota (410 per 100,000 adults), California (400 per 100,000 adults), and Colorado (380 per 100,000 adults). The states with the lowest entrepreneurial activity rates were Iowa (110 per 100,000 adults), Rhode Island (140 per 100,000 adults), Indiana (160 per 100,000 adults), Minnesota (160 per 100,000 adults), Washington (170 per 100,000 adults), and Wisconsin (170 per 100,000 adults).

• Among the fifteen largest MSAs in the United States, San Francisco (0.57 percent) had the highest entrepreneurial activity rate in 2013, and Philadelphia (0.18 percent) had the lowest rate.

Keywords: kauffman index, entrepreneurial, entrepreneur, entrepreneurship, policy, firm creation, job creation