Skill-biased entrepreneurial decline

Abstract

The U.S. is undergoing a long-term decline in entrepreneurship. We show that this slow-down in entrepreneurship has been more pronounced for skilled individuals – those with a college degree. We document new facts on the skill-biased nature of declining entrepreneurship and propose that it is a response to the rising worker skill premium observed over the same period. In support of this, we find that workers' earnings grew faster than entrepreneurs', particularly for skilled individuals, discouraging the pursuit of entrepreneurship. To quantify the impact of the skill premium on entrepreneurship, we develop a model of occupational choice with worker heterogeneity. In the model, a rising 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. A rise in the skill premium interacts with these forces to generate the skill-biased decline, and in doing so, shifts the composition of entrepreneurs towards the unskilled, lowering average entrepreneurial productivity. Our findings suggest an integral role for the changing income structure of workers in driving the broader decline in business dynamism in the U.S.