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More Start-ups in Low-Growth Industries

More people are creating businesses in low-income-potential sectors during the recession.
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Business creation rates in low-income potential sectors such as childcare and cleaning services increased last year, while creation rates for businesses in high-income potential sectors such as high-tech manufacturing decreased, according to the recently released 2008 Kauffman Index of Entrepreneurial Activity. The findings reveal early evidence of a rise in entrepreneurship out of necessity rather than opportunity.

In 2008, 130 new businesses were created per 100,000 people each month in low-income-potential types of businesses, according to the study, compared to 123 new medium-income-potential types of businesses. However, only sixty-nine new businesses were created each month per 100,000 people for high-income-potential types of businesses.

"During a recession, people often turn to self-employment because they can't find a job," explains Rob Fairlie, economics professor at the University of California Santa Cruz and author of the study. "Businesses like beauty salons or landscaping are easier and less expensive to start than a technology company, which explains the rise in low-income-potential businesses and the drop in high-income-potential ones."

This trend is consistent with previous economic downturns, according to data. When economic conditions were strong, low-and medium-income-potential business creation rates generally decreased, whereas high-income-potential business creation rates increased.

"It's a pretty consistent pattern, and we should see these numbers turn around as the economy rebounds," says Fairlie.




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