The state(s) of entrepreneurship

Everybody loves a ranking, except when you’re on the unflattering end. That’s particularly the case when it comes to business and entrepreneurial types of rankings, because economic activity and jobs are so desperately desired.

So it is that some states are clapping or wringing their hands over a recently released annual index of entrepreneurial activity by the Kauffman Foundation, the largest foundation in the world dedicated to entrepreneurial research. The index captures new business owners in their first month of significant business activity and then tabulates a score based on a state’s adult population (per 100,000 people). Kauffman uses consecutive-month reports from the Current Population Survey from the U.S. Census Bureau. It flags people who report working for themselves for at least 15 hours per week during the past month (and not doing so the month before that).

District states didn’t fare particularly well in the rankings. Montana was the only state to exceed the national average, and South Dakota came within a whisker (see chart). But North Dakota, Minnesota and Wisconsin lagged well behind.

Such rankings hold some interesting insights into entrepreneurial activity. But they are not particularly good barometers of a state economy or the economic well-being of its residents. For example, among the top six in entrepreneurial activity, half of the states were in the bottom half of per capita income, compared with only two of the six states with the lowest index ranking. Average income gains in 2011 also favored low-ranking states over high-ranking ones. On average, those in the bottom of the index also had lower unemployment than high-entrepreneurial states (see chart). That shouldn’t necessarily be a surprise: States with high unemployment tend to have more self-employed people by necessity as they hustle for any income they can find.

On the other hand, the performance of district states implies an old adage: in all things, moderation. District states rank toward the middle of the index pack, and even toward the lower third for Minnesota and Wisconsin. But their unemployment rates are all considerably below the national average, and per capita income was higher than the national average for three of the five states (Wisconsin and Montana are ranked 25th and 35th, respectively, among states). More to the point in annual rankings, every district state ranked in the top half in per capita income gains in 2011.

One final tidbit: North Dakota saw its 2011 index score drop from a year earlier and is considerably below the national average, yet it has by far the best unemployment rate in the country and had the highest gains in per capita income last year (6.7 percent). That doesn’t mean North Dakota’s entrepreneurial activity is necessarily in a good spot, but it does mean that one can’t read too much into any economic index.