Skill-Biased Entrepreneurial Decline

Abstract

The U.S. is undergoing a long-term decline in entrepreneurship. We show that this slowdown in entrepreneurship has been more pronounced for skilled individuals – those with at least a college degree. We propose that this skill-biased decline is a response to the rise in worker skill premium that occurred over the same period. In support of this, we document that earnings for workers grew faster than entrepreneurs, particularly for skilled individuals, discouraging the pursuit of entrepreneurship relative to wage employment. To quantify the impact of the skill premium on entrepreneurship, we develop a model of occupational choice that features worker heterogeneity. In the model, an increase in the skill premium – driven by skill-biased technological change – contributes little in lowering entrepreneurship. Instead, around 70% of the observed decline in entrepreneurship is driven by skill-neutral technological change and a rising share of college graduates. The rising skill premium interacts with these forces and fully explains the skill-biased nature of the decline. Further, by shifting the composition of entrepreneurs towards relatively low productivity entrepreneurs, an increase in the skill premium lowers average entrepreneurial productivity. This suggests an integral role for the changing income structure of workers in driving the broader decline in business dynamism in the U.S.