Financial Literacy and Employer Business Formation Across U.S. States: A Within-Between Analysis, 2020-2026

Financial literacy, the ability to understand and apply financial knowledge to make informed decisions and manage resources effectively, has often been studied for its importance to individual outcomes. This study examines its potential role in shaping entrepreneurship at the state level. Using descriptive correlation analysis and a mixed-effects within-between (Mundlak) panel regression model, this paper investigates the relationship between state-level financial literacy and employer business formation across the United States from 2020 to 2026. The results indicate that within-state increases in financial literacy are significantly associated with increases in employer business formation, even after accounting for selected economic conditions and state characteristics. The baseline model also identified a significant positive association between persistent differences in average financial literacy across states and business formation, while the controlled model showed that within-state increases in financial literacy remained significantly associated with increases in business formation. Together, these findings provide consistent evidence of a positive relationship between financial literacy and employer business formation, with the most robust association occurring between changes in financial literacy and business formation within states over time.