Though the recent recession was the worst downturn since the Great Depression, some observers argue that one silver lining is an upswing in entrepreneurship. Recessions, they claim, provide laid-off workers with the motivation to start their own businesses, and a recent study suggests that in 2009 the number people becoming self employed spiked to its highest level in more than a decade. Unfortunately, a careful look at multiple sources of data shows that the Great Recession was actually a time of considerable decline in entrepreneurial activity in the United States.>Recessions ; Small business ; Self-employed

Scott Shane

English

Research Papers in Economics

ECONOMIC COMMENTARY
Number 2011-04
March 24, 2011
The Great Recession’s Effect on 
Entrepreneurship
Scott Shane
Though the recent recession was the worst downturn since the Great Depression, some observers argue that one silver 
lining is an upswing in entrepreneurship. Recessions, they claim, provide laid-off workers with the motivation to start 
their own businesses, and a recent study suggests that in 2009 the number people becoming self employed spiked to 
its highest level in more than a decade. Unfortunately, a careful look at multiple sources of data shows that the Great 
Recession was actually a time of considerable decline in entrepreneurial activity in the United States. 
  ISSN 0428-1276
Between December 2007 and June 2009, the United States 
suffered its biggest economic downturn since the Great 
Depression. Dubbed the Great Recession, this economic 
contraction saw gross domestic product decline 4 percent 
and the unemployment rate more than double from 
4.9 percent to 10.1 percent.
While the media was full of reports about how the recession 
affected big business and consumers, it was largely silent on 
what happened to entrepreneurship. Economists are divided 
on the matter. 
Some believe that recessions have no effect on entrepre-
neurial activity, arguing that the negative effects of reduced 
demand are offset by the increased motivation to have one’s 
own business as a protection against layoffs.1 
Others believe that the Great Recession actually brought 
about an upswing in entrepreneurship, as the downturn 
pushed laid-off workers to pursue their entrepreneurial 
dreams. A press release announcing a recent report from the 
Ewing Marion Kauffman Foundation, for example, went 
so far as to argue, “Rather than making history for its deep 
recession and record unemployment, 2009 might instead 
be remembered as the year business startups reached their 
highest level in 14 years—even exceeding the number of 
startups during the peak 1999–2000 technology boom.”2 
Unfortunately, a careful look at the data suggests otherwise. 
Multiple sources of government and private data show that 
the Great Recession was actually a time of considerable 
decline in entrepreneurial activity in the United States. 
Self-Employment Fell
No single measure captures entrepreneurial activity perfectly. 
However, by looking at several different measures, we can 
piece together the big picture and use it to see how entrepre-
neurship fared during the Great Recession.
Self-employment is one variable that economists use to 
measure entrepreneurship, as the self-employed are in busi-
ness for themselves. The wage-employed, in contrast, work 
for others. As a statistic, self-employment has the advantage 
of measuring what happens to the widest range of entre-
preneurs because it includes people starting corporations 
with employees as well as those starting sole proprietorships 
without employees. 
The rate of transition into self-employment did in fact 
increase during the Great Recession. The Kauffman Index 
of Entrepreneurial Activity,3 which uses information from 
the Current Population Survey (CPS) to measure the per-
centage of the adult, non-business-owning population that 
starts a business each month, shows that the number 
of people between the ages of 20 and 64 who became self-
employed each month on average rose from 300 per thou-
sand people in 2007 to 340 per thousand in 2009. However, transition into self-employment is only part of 
the story. Many people who were self-employed before 
the recession exited during the downturn. Data from the 
Bureau of Labor Statistics (BLS) show that the rate of exit 
from self-employment must have increased even faster than 
the rate of entry into it because the stock of self-employed 
Americans fell during the Great Recession. BLS data reveal 
that the seasonally-adjusted number of unincorporated self-
employed Americans—the only measure of self-employment 
that adjusts for seasonality—fell from 10.2 million people in 
November 2007 to 9.8 million people in June 2009. 
The adverse effect of the Great Recession on employment 
was slightly worse for self-employed people than for those 
who worked for others. From December 2007 to June 2009, 
the number of self-employed people fell 4.4 percent, while 
the number of wage-employed people dropped 4.3 percent. 
Another view of entrepreneurial activity can be obtained by 
comparing numbers on incorporated and unincorporated 
self-employment. That comparison lets us tease out how the 
recession affected two different kinds of people who work 
for themselves—those who run corporations and are likely to 
employ others and those who don’t, mostly sole proprietors 
less likely to have employees. Both types of self-employment 
fell during the recession, but the decline was much more 
severe for those running corporations. BLS numbers show 
that (nonseasonally adjusted) incorporated self-employment 
dropped by 519,000 people between November 2007 and 
June 2009, a reduction of 8.9 percent, while (nonseasonally 
adjusted) unincorporated self-employment fell by 48,000 
people, a decline of 0.5 percent. 
This pattern has important implications for the question at 
hand. Corporations have more of an economic impact in 
general than sole proprietorships. The pattern in the BLS 
data suggests that the more substantial type of entrepreneur-
ial activity was more adversely affected by the recession 
than the less substantial kind, a pattern that is conﬁ  rmed by 
other sources of data.
Many Employer Firms Disappeared
Some economists believe that entrepreneurship is best mea-
sured not by self-employment, but by the number of people 
who own and operate businesses. Therefore, understanding 
what happened to the stock of employer ﬁ  rms during the 
Great Recession is important for assessing the impact of the 
recession on entrepreneurial activity.
The U.S. business stock is composed of two types of ﬁ  rms: 
employer ﬁ  rms, which, as the name suggests, have employees, 
and nonemployers, which do not. Nonemployer ﬁ  rms are 
more common—80 percent of U.S. businesses have no em-
ployees, according to Census Bureau estimates—but they have 
far less economic impact. Census Bureau ﬁ  gures show that 
employer ﬁ  rms account for 97 percent of private sector GDP. 
From 2007 through 2009, the number of employer ﬁ  rms 
declined from 6,050,000 to 5,904,000—a loss of 146,000 
employer businesses (ﬁ  gure 1). Virtually all of the disap-
pearing companies were small businesses because, as the 
SBA explains, small businesses make up 99.7 percent of all 
employers in this country.4 While the number of employer 
businesses also fell in the previous two recessions, the magni-
tude was much larger in the Great Recession. Speciﬁ  cally, the 
decline in the number of employer businesses in the Great 
Recession was 6.5 times the number of employer businesses 
lost in the last two recessions combined. Unfortunately, we 
do not have the data to look at the magnitude of these de-
clines in the 1973 and 1980–1981 and 1981–1982 recessions.
Figure 2.  Businesses with Employees
Source: Created from data from The Small Business Economy: A Report to the 
President, 2010. The Small Business Administration, Ofﬁ  ce of Advocacy. 
Figure 1.  Net Change in Employer Businesses
Source: Created from data from the U.S. Small Business Administration, Ofﬁ  ce 
of Advocacy.
–150
–100
–50
0
50
100
150
1990 1995 2000 2005 2009
Net change in number of businesses, thousands
18.0 
18.5 
19.0 
19.5 
20.0 
20.5 
1990 1995 2000 2005 2009
Number of businesses per thousand AmericansWhen measured on a per capita basis to adjust for the rising 
U.S. population over time, the magnitude of this loss of 
businesses is even starker. As ﬁ  gure 2 shows, the drop was 
the largest since data have been collected. 
The mix of employer and nonemployer ﬁ  rms shifted slightly 
toward a lesser share of employers. From 2007 to 2009, SBA 
data show that the number of nonemployer ﬁ  rms decreased 
by 0.1 percent, while the number of employer businesses 
declined 2.4 percent. As a result, the employer share of 
U.S. businesses ticked down from 21.7 to 21.4 percent. 
This pattern suggests that entrepreneurial activity shifted 
(slightly) toward less substantial businesses during the 
Great Recession.
Firm Formation Declined
The number of employer ﬁ  rms could have declined because 
fewer people started businesses or because more people 
closed down existing businesses, or both. The data indicate 
that both factors contributed to the decline in the number 
of employer ﬁ  rms during the Great Recession, but the 
negative effect of declining business formation was greater 
than the effect of business closure. According to SBA data, 
68,490 more businesses closed in 2009 than in 2007, an 
11.6 percent increase in the business closure rate. But in 
2009, 115,795 fewer employer businesses were founded 
than in 2007, a 17.3 percent decline in ﬁ  rm formation.
Moreover, the number of new employer ﬁ  rms started in 
2009 was 553,000, the lowest number since 1992, according 
to the SBA. When the numbers are adjusted for population 
growth, this decline is even more severe, with the number of 
new employer ﬁ  rms decreasing from 2.2 per thousand people 
in 2007 to 1.8 per thousand people in 2009, the lowest per 
capita business formation rate since 1998.
Different sources show that other measures of entrepre-
neurial activity declined as well during the Great Recession. 
The index of total entrepreneurial activity, calculated from a 
survey called the Global Entrepreneurship Monitor, captures 
the share of the adult-age population that is engaged in activi-
ties to set up new businesses. That index declined from 9.6 
percent in 2007 to 7.9 percent in 2009.5 
BLS data on new private establishments (a combination of 
new ﬁ  rms and new outlets at existing businesses) also show 
a decline during the Great Recession. Between the third 
quarter of 2007 and the second quarter of 2009, the season-
ally adjusted number of new private establishments fell from 
218,000 to 176,000, a decline of 19.3 percent—20.8 percent 
when measured on a per capita basis.6 
This decline in ﬁ  rm formation was not restricted to the 
United States. Leora Klapper and Inessa Love of the World 
Bank7 used World Bank data on new incorporations to ex-
amine what happened to new business creation in 95 coun-
tries during the recent downturn. They found that the rate 
of formation of new corporations dropped during the Great 
Recession in the United States and elsewhere, concluding that 
“nearly all countries experienced a sharp drop in business 
entry during the crisis.” 
Conclusions 
Despite the claim that recessions are a time of opportunity for 
entrepreneurs, the Great Recession had a negative impact on 
U.S. entrepreneurship. At the end of the recession, the United 
States had fewer businesses and self-employed people than 
it had before the downturn began. While some measures 
indicate that a big part of this decline came from the increased 
closure of existing businesses, the largest effect came from a 
decline in new business formation, particularly for businesses 
with employees, the more economically substantial type of 
business. 
Moreover, the data show that the negative effect of the Great 
Recession was largest on the most substantial entrepreneurial 
efforts, adversely affecting new employer ﬁ  rms more than 
nonemployer businesses, and incorporated self-employment 
more than unincorporated self-employment. By most available 
measures, the Great Recession’s effect on entrepreneurship 
was negative.
Footnotes
1. “Exploring Firm Formation: Why Is the Number of New 
Firms Constant?” by Dane Stangler and Paul Kedrosky, 2010. 
Kauffman Foundation Research Series: Firm Formation and 
Economic Growth, Ewing Marion Kauffman Foundation. 
<www.kauffman.org/uploadedFiles/exploring_ﬁ  rm_forma-
tion_1-13-10.pdf>.
2. “Despite Recession, U.S. Entrepreneurial Activity Rises in 
2009 to Highest Rate in 14 Years, Kauffman Study Shows,” 
News release, Ewing Marion Kauffman Foundation, May 20, 
2010. <www.kauffman.org/newsroom/despite-recession-us-
entrepreneurial-activity-rate-rises-in-2009.aspx>.
3. “Kauffman Index of Entrepreneurial Activity, 1996–2009,” by 
Robert W. Fairlie, 2010. Ewing Marion Kauffman Foundation. 
<www.kauffman.org/uploadedﬁ  les/kiea_2010_report.pdf>.
4. “How Important Are Small Businesses to the U.S. Econ-
omy?” Small Business Administration webpage. <www.sba.
gov/advocacy/7495/8420>. 
5. “Global Entrepreneurship Monitor: 2009 National 
Entrepreneurial Assessment for the United States of America, 
Executive Report.” by Abdul Ali and others. Babson College, 
Baruch College. <www3.babson.edu/ESHIP/research-publi-
cations/upload/GEM_2009_Executive_Report.pdf>.
6. Table 7. Private Sector Establishment Births and Deaths, 
Seasonally Adjusted. Economic News release, United States 
Department of Labor, Bureau of Labor Statistics. <www.bls.
gov/news.release/cewbd.t07.htm>.
7. “The Impact of the Financial Crisis on New Firm 
Creation,” Leora Klapper and Inessa Love. Preliminary 
draft, September 29, 2010. <www.frbatlanta.org/documents/
news/conferences/10smallbusiness_klapper.pdf>.Scott Shane is a visiting scholar at the Federal Reserve Bank of Cleveland and the A. Malachi Mixon III Professor of Entrepreneurial Studies 
at  Case Western Reserve University. The views he expresses here are his and not necessarily those of the Federal Reserve Bank of Cleve-
land, the Board of Governors of the Federal Reserve System, or Board staff.
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