COVID-19 / Entrepreneurs / Resources / Small businesses

Yes, rates of entrepreneurship actually are increasing during the pandemic

Hundreds of thousands more people applied to start a business this year than last, according to Penn Wharton Budget Model analysis.

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Throughout the second half of 2020, anecdotal stories about more and more people becoming entrepreneurs have been popping up across the city and nation.

It makes sense, despite the recession. Maybe your job was laying people off, or you suddenly had to figure out how to work while facilitating online schooling for kids. It could be the perfect time to put some effort into that business idea you’ve had in the back of your mind for years.

But data from the U.S. Census Bureau’s Weekly Business Formation Statistics shows us that it doesn’t just feel like there are more new small businesses popping up — there actually are.

The country saw widespread business closures at the beginning of the pandemic, and a decrease in applications for new businesses in the spring; by early May, there were about 110,000 fewer than at the same point the previous year. But in the second half of of 2020, those numbers are rebounding, and then some: As of mid-November, there were 700,000 more business applications than at the same point in 2019, especially in pandemic-affected areas like retail, the Penn Wharton Budget Model found.

The Census Bureau also identifies which businesses have a relatively high likelihood of becoming a new business with employees and refer to them as “likely employer” applications. Those increased by 170,000 compared with 2019, said the report, which used analysis conducted by Senior Analyst Alexander Arnon. This contrasts what the nation saw during the last major recession about 12 years ago, when business applications decreased in November 2008 by 230,000 compared to the same time of year in 2007.

The trend is an anomaly, Technically Media CEO Christopher Wink wrote last month.

“Far more commonly, we shelter in place during recessions and only later during economic upswings do rates of entrepreneurship increase,” he said.

A business application is usually the first step a new business owner would take to begin operating. It assigns the business an Employer Identification Number, or EIN, which is required to run payroll taxes. But not all business applications lead to full-fledged business. About 9% of business applications form an employer business within one year, and only around 25% of likely employer applications become operational within one year of the application date, per the PWBM report.

But these trends in applications are promising: New businesses create new jobs more often than existing businesses, the report said. And the industries these new businesses plan to operate in show a likely response to problems caused by the pandemic. By far, the most applications were for non-store retailers, or strictly ecommerce businesses.

The report found industries like personal and laundry services, professional, scientific and tech services, and admin support services saw the most growth in business applications. And that’s good news for job growth, the report said, as on average, new businesses in these areas create between three and five new jobs.

“By the third quarter of 2021, 264,000 new businesses will have originated from applications filed in the first three quarters of 2020 — the most for any three-quarter period since 2008 — creating almost 1.5 million jobs,” the report summarized.

Companies: U.S. Census Bureau / Wharton School
Series: Coronavirus

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