We recently featured a post regarding how venture capital is associated with economic mobility. We know that these are strongly correlated—and that, if we are concerned with the ability of children today to obtain ‘The American Dream,’ we should be concerned with how to increase economic mobility.
To understand more about how cities can increase intergenerational economic mobility, we wanted to take a look at another measure of entrepreneurship: small businesses per capita.
We follow Glaeser, et al, and measure the number of businesses with 20 or fewer employees per 1,000 population in each of the nation’s largest metropolitan areas. As in the previous post, we measure economic mobility as the probability that children born in the bottom quintile rise to the top quintile as adults.
The chart below shows the results: cities with a larger number of small businesses per capita have higher rates of economic mobility. This relationship is positive, but statistically less strong a fit (R-squared: .16) than venture capital.
The data from this post and the previous one suggest that there a positive relationship between entrepreneurship and higher levels of economic mobility, particularly that economic mobility is somewhat correlated with higher numbers of small businesses and more strongly correlated with venture capital.
This analysis is both partial and preliminary. We know from Chetty, et al, that there are other factors (segregation, schools, family structure) that influence economic mobility. A more comprehensive analysis would consider whether or not after controlling for the variation explained by these other factors there was any remaining variation explained by entrepreneurship. Moreover, these relationships are simple correlations, and do not necessarily indicate cause and effect. For example, it could be that economic mobility causes entrepreneurship. Furthermore, our data on small businesses and venture capital are taken from recent years; a more rigorous analysis would look to see whether small business and venture capital levels of two or more decades ago were correlated with economic mobility over the succeeding time period.
Still, taken as a whole, the data suggest that more entrepreneurial places have higher levels of economic mobility. Why this relationship exists and what implications it may have for policy are questions worthy of further research.
To learn more about innovation and entrepreneurship from a metro perspective, go to our cards here. (We also feature information on economic mobility and opportunity, economic segregation, and more here.)