Skill-Biased Entrepreneurial Decline

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.