There’s no end to the commentary about class divisions driven by the growing disparity between the rich and the poor in the U.S.

But does an increased concentration of wealth lead to less entrepreneurship, and fewer startups, as some would suggest? It turns out there’s no definitive proof either way, according to some economic experts. Still, there are surprising links between wealth and entrepreneurship that could offer some insight into why entrepreneurship rates may be higher in certain areas than others.

To try to understand why that might be, I’ve looked at two studies: one released Thursday from the personal finance social network WalletHub and the other from last May, came from the Washington D.C.-based think tank, Brookings Institution. The former focused on metro areas and income and educational diversity and the latter on declining business dynamism.

It turns out that areas with a lot of educational and income diversity also have a lot entrepreneurship. No big surprise there. But it also turns out that some areas with less diversity on both fronts do as well. So what gives?

“We found a declining startup rate to be a secular trend throughout the U.S. metro areas, but not at the same rate,” says Robert Litan, a senior fellow specializing in economics at Brookings. The paper on declining business dynamism, which Litan co-wrote with Ennsyte Economics scholar Ian Hathaway, shows an overall decrease in new business activity in 360 metro areas throughout the U.S. over the past 30 years.

The two biggest factors that affect new business activity, for the better and the worse, are population growth and increasing business concentration, Litan says. States with growing populations tend to have more entrepreneurship. By contrast, states with growing business concentration--by which Litan means businesses with more than one location in a geography--experienced more competition, which can be bad for startups.

So here’s what WalletHub found, using U.S. Census Bureau data from a 2013 survey on communities. It ranked metro areas on a scale of 1 to 350 for income and educational diversity. Areas with a greater diversity of educational classes and income brackets scored higher than those with less diversity.

The most diverse areas of the country aren’t necessarily ones that have captured the popular imagination. Carrollton, Texas, a suburb of Dallas that boasts 9,000 businesses, for example, came in first. On the other hand, Flint, Michigan ranked dead last, with a score of 350 for income diversity and 343 for educational diversity.

And there is perhaps no more storied example of Rust Belt decimation than Flint, which was made famous by the 1989 Michael Moore film Roger & Me, about the closure of automobile plants in the area and mass layoffs of workers.

Taking a deeper dive, WalletHub found that 65 percent of people over the age of 18 living in Flint had incomes under $35,000. Less than 1 percent of the population had incomes over $150,000.

By contrast, San Jose, part of the thriving tech-focused Silicon Valley which depends on startups for its economic activity, ranked in the top five of WalletHub’s list. An equal percentage of the population--22.5 percent--earned either less than $35,000 annually, or more than $150,000 each year. Nearly 30 percent of the population had incomes between $50,000 and $100,000 annually.

A bit further down the list, signifying less economic diversity, and tying with Thousand Oaks, California at 74, is New York City, home to Wall Street, Silicon Alley, and the legendary 1 percent. Here the picture is more of a mixed bag.

It’s safe to say that the business concentration Litan talks about, which can squelch competitiveness, is also in full swing New York, for example in finance, with its big powerhouse banks. Nevertheless, the population is also growing faster than it has in decades, bringing with it a fresh pool of immigrants and new entrepreneurial ideas.

New York also ranks in the top 10 for educational diversity, meaning it has a good distribution of those with advanced degrees and those who have a high school education or less. In fact, 80 percent of New York residents had either a high school diploma, some college, an associates degree, or a bachelor’s degree.

When it comes to income, 37 percent of the state earn less than $35,000, and equal percentage earn between 35,000 and 100,000 annually. And that legendary 1 percent, earning more than $150,000 a year makes up 12.5 percent of the population.

Certainly a concentration of wealth, for example in rural parts of the South--which tends to have fewer residents than Northern or Western cities--has a negative impact on startups and local economies, says Litan. But the opposite may also be true, particularly if an area's population is expanding.

“It’s a plausible hypothesis that areas with a high degree of entrepreneurship are more likely to have higher concentrations of wealthier people,” Litan says.

A higher concentration of wealth also provides a stronger tax base, says Jill Gonzalez, a spokeswoman for Evolution Finance, the parent company of WalletHub. That in turn can support better local education, which in turn can promote more startups, completing the virtuous circle.

“Income levels follow education levels, and vice versa,” Gonzalez says.

Published on: Feb 19, 2015