Skill Biased Entrepreneurial Decline

The U.S. is undergoing a long-term decline in the rate of firm startups. We document that this slowdown in entrepreneurship is more pronounced for skilled individuals. Between 1983 and 2006 the entry rate into entrepreneurship... [ view full abstract ]

The U.S. is undergoing a long-term decline in the rate of firm startups. We document that this slowdown in entrepreneurship is more pronounced for skilled individuals. Between 1983 and 2006 the entry rate into entrepreneurship declined by 11% for those with a college degree and increased by 18% for those with a high school degree or some college experience. We posit that this skill biased entrepreneurial decline is a response to the changing income structure of workers and entrepreneurs that occurred over the same period. We show that entrepreneurial income grew more slowly than worker's income for skilled individuals while for unskilled individuals both incomes grew at relatively similar rates. To quantify the impact of income structure on entrepreneurial entry we present a simple heterogeneous-agent occupational choice model, which takes as given a rising worker skill premium, driven by skill biased technical change. In the model, the rising worker skill premium can account for around two-thirds of the changes in entry among skilled and unskilled individuals between 1983 and 2006. This paper contributes to understanding the forces behind the broader decline in business dynamism in the U.S. and suggests an integral role of rising income inequality in driving this phenomenon.