Michelle Stash had the entrepreneur's version of the American dream: a thriving little shop in a picturesque town full of family and friends.
Her boutique, dubbed Shoefly, had six employees at its peak in 2006 and even made it through the crisis, selling stylish shoes, locally made clothes and gifts in downtown Bozeman, Mont. But in June, Stash held one last sale and happily took a job as a front-office manager at a restaurant down the street.
"I really wasn't making any money, and I was working a ton," she said. "That's OK in the beginning of the business--t's almost exciting at that point. But after five or six years, it just kind of got on my mental state."
While the U.S. job market has taken off since the Great Recession, American entrepreneurship is still struggling to find its feet. In April, only 14.6 million U.S. residents were self-employed--that's 10% fewer than five years ago, according to federal data released Friday. In that same window of time, the self-employment rate--or the percentage of all workers who are self-employed--has dropped almost a full percentage point to 10.3%.
Meanwhile, the rate of entrepreneurship is slowing. The share of U.S. residents who tried to launch businesses last year dropped 5.9% from the year-earlier period, according to a May report from the Kauffman Foundation of Entrepreneurship.
Many small-business owners, like Stash in Montana, grew too discouraged to continue, particularly as opportunities for wage and salaried positions improved. Other would-be entrepreneurs are still too scarred by the recent downturn to start ventures.
"It's not so surprising that people who were self-employed are getting jobs," said Scott Shane, an entrepreneurship professor at the Weatherhead School of Management at Case Western Reserve University. "What's surprising is that we're fairly far into the recovery and yet we have fewer self-employed people now than we did at the start … Nobody really knows what's happening here."
Shane said the decline in self-employment could be partially attributed to a "shellshocked" workforce with a lingering pessimism about the economy. Tightening credit markets have exacerbated the issue.
In the first quarter of the year, lending to small businesses was still 23% below the levels it was at in the first three months of 2007, according to data compiled by Thomson Reuters and PayNet.
"I think it's probably more financing than psychology," said Steven Rose, an economics professor at Georgetown University's Center on Education and the Workforce. "But I also think there's a certain hesitancy in people. Some think, 'Gee, I probably can't pull this off.' "
There are some bright spots in the self-employment picture. Most notably, a drop in the entrepreneurship rate usually happens in concert with a drop in the unemployment rate.
And the current crop of people bootstrapping a living for themselves--including those who came through the crisis--appears to be a hardier lot than those in the heady days of 2007. Some of them are even hiring. Businesses with less than five employees added a net 47,000 jobs between the end of 2009 and October 2011, according to the most recent federal data. That was a vast improvement over 2008 and 2009, when the same category of firms shed 440,000 workers.
In other words, fewer people are launching businesses these days, but those who do are finding more success. This is the kind of thing labor economists like to see, because it means fewer Americans are "necessity entrepreneurs" who simply can't find any other way to work.
"You're going to kind of skim off that group of people who really started businesses just to survive the recession," said Robert Fairlie, an economics professor at the University of California Santa Cruz. "But you should also see an increase in better-potential businesses."
Business startups could also get a boost from the JOBS act signed into law a month ago, which makes it easier for startups to raise small amounts of money from a large pool of individual investors.
Still, the recession-era hope that mass layoffs and American ingenuity would permanently carve out a bigger niche for self-employed workers seems unlikely to pan out.
Shane at Case Western said most people are under the misguided impression that entrepreneurship is still thriving in the U.S. even as sole proprietors scramble for the benefits and security of wage and salaried positions.
"People always let you know when they're starting a new business, but if you are closing a business, that's not something you really want to announce," he said.
Back in Bozeman, Mont., for example, Stash no longer worries about competing with Wal-Mart. She loves her new restaurant job; the pay is good and steady, the hours aren't indefinite, and she still gets to make management decisions.
Meanwhile, a young couple took over her lease last summer and opened a high-end shoe store. The venture didn't last through the holidays. "We tried to help them out with suggestions, but they weren't too interested," Stash said. "When they left town, it was a middle-of-the-night kind of thing."
This story first appeared on The Daily.
