Jul 30, 2021 Macro

An entrepreneurial recovery

New businesses have been mushrooming in the United States since the start of the pandemic. That could have big implications.

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Becoming self-employed is never easy. Nor is it usually all that common during times of economic distress.

A little over a decade ago, during the great recession that saw Lehman Brothers collapse, various measures of business formation and entrepreneurship show sharp declines. By contrast, an intriguing recent National Bureau of Economic Research (NBER) Working Paper suggests that the United States has seen a surge in start-up activity since Covid-19 first made its mark on the world economy.[1]

As our Chart of the Week shows, the number of self-employed workers of both the incorporated and the unincorporated sort is growing on a year-on-year basis. New business formation has largely offset the decline one might usually expect with businesses closing down during an economic downturn. Quite how and why this once in a century pandemic may have boosted entrepreneurial spirits remains a little unclear and there has been little evidence of a similar pattern in other countries.[2]

Keeping track of business closures is a lot trickier, as survey non-response is inherently higher for businesses winding down.

Partly, that might be a matter of data availability. In the United States, filing an application for business tax registrations is largely automated via online applications so that disruptions in administrative agencies seem to have had little impact on tracking them. The U.S. government releases figures on new-business formation with unusual frequency, providing fertile ground for economic researchers.[3] Keeping track of business closures is a lot trickier, as survey non-response is inherently higher for businesses winding down.

All told, the NBER paper finds that applications for new businesses since the start of the pandemic were unusually numerous. There are also some tantalizing signs that the class of Covid-entrepreneurs may include quite a few of the sorts of startups spurring job creation, innovation, and productivity growth in subsequent years (rather than, say, self-employed drivers for ride-hailing services). "Only time will tell whether it will, of course," cautions Christian Scherrmann, U.S. economist at DWS. "But it will certainly be worth watching."

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1. John C. Haltiwanger (2021), "Entrepreneurship During the COVID-19 Pandemic: Evidence from the Business Formation Statistics", National Bureau of Economic Research Working Paper Series - No. 28912; http://www.nber.org/papers/w28912

2. https://www.economist.com/united-states/2020/10/10/the-number-of-new-businesses-in-america-is-booming

3. https://www.economist.com/united-states/2021/06/26/new-business-formation-in-america-goes-bezonkers

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