The COVID-19 pandemic has unexpectedly fueled a robust surge in entrepreneurship across the United States, defying initial recession concerns, labor and supply-chain challenges, elevated inflation rates, and rapid interest rate hikes. Notably, even three and a half years after the pandemic’s onset, Americans continue to submit 59% more applications to initiate new businesses than pre-pandemic levels. This revival is particularly noteworthy given the prolonged entrepreneurial downturn experienced throughout the 2010s.
The enduring question surrounding the U.S. economy revolves around whether the pandemic has genuinely shaken the nation out of its entrepreneurial slump. The answer holds significant implications for various economic aspects, from job growth to productivity. To comprehend this phenomenon, it is essential to delve into the driving forces behind the surge, assess its economic significance, and explore potential policies to sustain it.
Significance of Startups:
Startups play a pivotal role in job creation and productivity growth. They contribute significantly to net job creation, as high-growth young firms often offset employment losses at downsizing incumbents. Moreover, startups drive productivity by adopting new technologies, introducing innovative business models, and fostering competition, thereby optimizing the economy’s resources.
Contrary to expectations, the latest data from the U.S. Census Bureau indicates that the startup surge is ongoing. In October 2023 alone, the Internal Revenue Service (IRS) received 473,000 applications to establish new businesses, with a notable 41% increase in likely employer business applications compared to October 2019 levels. This sustained momentum suggests the potential economic significance of the resurgence.
Several conditions have enabled this entrepreneurial boom. The pandemic, unlike a conventional recession, increased household wealth, empowering individuals to take risks and pursue entrepreneurial endeavors. Technological advancements facilitated online service provision, allowing workers to pivot seamlessly to digital platforms. Additionally, changing consumer habits, influenced by the shift in economic activity from urban hubs to suburban areas, created numerous new business opportunities.
The surge’s catalysts include technology’s role in providing a safety net for workers during the pandemic, allowing them to offer services online. The geographic shift in economic activity further expanded potential business opportunities. The pandemic’s profound impact on individuals, both economically and personally, prompted introspection, contributing to a wave of entrepreneurial decisions.
Real or Transient?
While initial skepticism surrounded the trends, the sustained nature of the surge indicates its potential economic impact. Business applications have historically been a reliable leading indicator for future job growth, and recent data suggests a correlation between increased applications and job creation. The surge in self-employment and the rise in genuine new employer firms further support the notion that the startup boom is indeed economically significant.
The entrepreneurial surge in the United States surpasses trends observed in other developed countries. OECD data reveals a 34% increase in business establishment openings in the U.S. by the end of 2022 compared to 2019 levels. In contrast, countries like Belgium and France exhibit 22-25% increases, while Germany and Italy show minimal or negative changes.
To nurture this entrepreneurial revival, policymakers must adopt a proactive approach. Prioritizing policies that “do no harm” to business creation, supporting retirement savings to de-risk entrepreneurship, and curbing the use of restrictive non-compete agreements are crucial steps. Fostering a pro-dynamism agenda will ensure that this unexpected surge in entrepreneurship becomes a cornerstone for the nation’s economic trajectory.
In conclusion, the enduring and robust entrepreneurial surge triggered by the COVID-19 pandemic challenges initial expectations. Understanding the driving forces, assessing economic significance, and implementing supportive policies will be instrumental in capitalizing on this unexpected boon and steering the U.S. economy toward sustained growth and dynamism.