The ACA and Entrepreneurship: The Importance of Age

Thinking about one of my older papers today, since I just heard it won the Eckstein award for best paper in the Eastern Economic Journal in 2019 & 2020.

One big selling point of the Affordable Care Act was that by offering more non-employer-based options for health insurance, it would free people who felt locked into their jobs by the need for insurance. This would free people up to leave their jobs and do other things like start their own businesses. Did the ACA actually live up to this promise?

It did, at least for some people. The challenge when it comes to measuring the effect of the ACA is that it potentially affected everyone nationwide. If entrepreneurship rises following the implementation of the ACA in 2014, is it because of the ACA? Or just the general economic recovery? Ideally we want some sort of comparison group unaffected by the ACA. If that doesn’t really exist, we can use a comparison group that is less affected by it.

That’s what I did in a 2017 paper focused on younger adults. I compared those under age 26 (who benefit from the ACA’s dependent coverage mandate) to those just over age 26 (who don’t), but found no overall difference in how their self-employment rates changed following the ACA.

In the 2019 Eastern Economic Journal paper, Dhaval Dave and I instead consider the effect of the ACA on older adults. We compare entrepreneurship rates for people in their early 60’s (who might benefit from the availability of individual insurance through the ACA) with a “control group” of people in their late 60’s (who are eligible for Medicare and presumably less affected by the ACA). We find that the ACA led to a 3-4% increase in self-employment for people in their early 60’s.

Figure 1 from our 2019 EEJ paper

Why the big difference in findings across papers? My guess is that it’s about age, and what age means for health and health insurance. People in their 60s are old enough to have substantial average health costs and health insurance premiums, so they will factor health insurance into their decisions more strongly than younger people. In addition, the community rating provisions of the ACA generally reduced individual premiums for older people while raising them for younger people.

In sum, the ACA does seem to encourage entrepreneurship at least among older adults. At the same time, our other research finds that the employer-based health insurance system still leads Americans to stay in their jobs longer than they would otherwise choose to.

Main Street Entrepreneurship is Back

Silicon Valley venture-backed tech startups have had a wildly successful twenty years, coming to dominate the markets. But tech remains a relatively small sector in terms of the total number of businesses and employees, and by many measures entrepreneurship and small business have been in relative decline in the US during the 2000’s.

Source: Business Employment Dynamics data compiled by Kauffman Foundation

Covid accelerated many pre-existing trends, like the shift to remote work. But it reversed other trends, and seems to have led to a revival in entrepreneurship broadly.

Source: Current Population Survey Data complied by Kauffman Foundation

A new report from the Kauffman Foundation, “2021 NATIONAL REPORT ON EARLY-STAGE ENTREPRENEURSHIP IN THE UNITED STATES“, illustrates this reversal, showing that the rate of new entrepreneurs is the highest its been since at least 1996.

This wasn’t all good at first- in 2020, the share of “necessity entrepreneurs” also reached record highs. These are people who start a business because they can’t get the job they want, not because they expect their business to be wildly successful. But in 2021, the rate of new entrepreneurs remained high while the share of “necessity entrepreneurs” and “opportunity entrepreneurs” returned to their normal balance.

Another good sign is that the share of businesses surviving at least a year is also at record levels:

More cracks in the Great Stagnation.