Technical Change and Entrepreneurship

The proportion of entrepreneurs in the US working-age population has declined over the last three decades. Over the same period, there has been a substantial increase in the returns to highly educated workers. This paper relates these two facts. Using individual-level data, I provide evidence on the decline in the population share of entrepreneurs and in the entry rate into entrepreneurship. I also show that the decline is most concentrated among college graduates. Then, using an otherwise standard entrepreneurial choice model with two skill groups of individuals, I show that the decline in entrepreneurship is the equilibrium outcome of two forces that have increased the returns to high skill labor: the skill-biased technical change and the decrease in the cost of capital goods. I find that these two technological forces jointly account for three-quarters of the decline in the share of entrepreneurs observed in the United States over the last 30 years.