The objective of ECONOMIC INSIGHTS is explain latest economic data and what it means for Delaware businesses.
According to census data on business dynamics, the number of business establishments entering Delaware’s economy as a percent of total establishments has fallen from 16.3 percent in 1987 to 10.1 percent in 2013, the last year of data. There has been a steady decline over 20 years in the startup of new business establishments in the first state. Following the most recent recession there was even a period where the rate of establishment exits exceeded the rate of entry.
Why is it happening?
The dropoff in business-establishment startups is not unique to Delaware. The exact same pattern for entry and exit rates is found for the United States. This trend has been accompanied by a decline in the share of economic activity in both Delaware and the nation accounted for by younger businesses. At the same time, adjusted for industry mix, the average wage of workers at younger firms has fallen relative to the wage at established firms. And the job openings available at any one time diminish, as there is less job turnover at established firms.
It is notable that the rate of entrepreneurship has dropped off primarily among the millennials. This is driven by a number of factors. First, the last recession was very severe and, in a soft labor market, millennials are more likely to seek and hold on to jobs with established firms. Second, student debt has soared and reduced the savings millennials might previously have put into a new venture. Finally, home ownership among millennials has plummeted and owned houses have been a traditional source of new-venture loan collateral.
Added to that has been a tsunami of business regulations under the Obama administration, the new affordable health care program and an uptick in occupational licensing at the state level.
The implications for business?
The economic growth of a state or a nation is closely wedded to the extent of “creative destruction” — the rate at which businesses and industries come and go. As painful as the closing of an existing business is, the startups bring new technology and produce goods and services that are in accord with changing demand.
The current decline in entrepreneurship translates directly into lower economic growth and a more stagnant economy.
Dr. John E. Stapleford is a consulting economist with DECON First. Contact him at email@example.com