Entrepreneurship, Economic Conditions,and the Great Recession

The “Great Recession” resulted in many business closings and foreclosures, but what effectdid it have on business formation? On the one hand, recessions decrease potential businessincome and wealth, but on the other hand they restrict opportunities in the wage/salary sectorleaving the net effect on entrepreneurship ambiguous. The most up-to-date microdataavailable – the 1996 to 2009 Current Population Survey (CPS) – are used to conduct adetailed analysis of the determinants of entrepreneurship at the individual level to shed lighton this question. Regression estimates indicate that local labor market conditions are a majordeterminant of entrepreneurship. Higher local unemployment rates are found to increase theprobability that individuals start businesses. Home ownership and local home values forhome owners are also found to have positive effects on business creation, but these effectsare noticeably smaller. Additional regression estimates indicate that individuals who areinitially not employed respond more to high local unemployment rates by starting businessesthan wage/salary workers. The results point to a consistent picture – the positive influencesof slack labor markets outweigh the negative influences resulting in higher levels of businesscreation. Using the regression estimates for the local unemployment rate effects, I find thatthe predicted trend in entrepreneurship rates tracks the actual upward trend inentrepreneurship extremely well in the Great Recession....