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Entrepreneurship Is a Key to Poverty Reduction

November 4, 2014

During the economic boom of the 2000s, the poverty rate – the percentage of the state population that lives under the federal poverty line – went down in many states. That’s not too surprising – a rising economic tide will usually lift all boats.

But some states were more effective at lowering the poverty rate than others. As I explain in my new report published by the Goldwater Institute, government policies can decrease poverty by encouraging a key driver of job creation in a state: the level of entrepreneurship.

There has been a substantial number of academic studies that show entrepreneurial endeavors can help move people out of poverty, whether they start their own business – like a food truck or a hair salon – or whether they are hired by an entrepreneur. A classic study published by the National Bureau of Economic Research in 2000 concluded that, “for individuals who began toward the bottom of the earnings distribution, continuous experience with self-employment was a successful strategy for moving ahead (relative to wage-earners), both in the short- and long-term.”

In my study, I found that higher average rates of entrepreneurship in a state correspond to bigger declines in poverty. In fact, for every one percentage point increase in the number of entrepreneurs in a state, there is a two percent decline in the poverty rate. A decline in the poverty rate of this magnitude means thousands of families would be able to provide for themselves and start pursuing their versions of the American Dream.

The engine that drives economic growth – free enterprise – is also the best way to help lift people out of poverty. In this light, striking down barriers to entrepreneurship – like licensing requirements that hurt poor entrepreneurs the most – should be seen as an anti-poverty policy. And it’s one that has a much better chance of long-term success than temporary government programs.

Learn more:

Goldwater Institute: Increasing Entrepreneurship is a Key to Lowering Poverty Rates

Goldwater Institute: Unlocking Entrepreneurial Forces

National Bureau of Economic Research: Horatio Alger Meets the Mobility Tables



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