Entrepreneurship Is on the Rise, Despite COVID-19

Necessity became opportunity for many who started businesses.

To the list of unpredictable outcomes of the pandemic and related policy-based disruptions of American life, add a surge in business startups. After years of declining entrepreneurship, a previously risk-averse population appears to have peered open-eyed at a society gone off the rails despite its hopes and committed to embracing the resulting opportunities.

"Despite a health catastrophe and one of the worst economic downturns in modern history, startup business activity grew in the United States last year—business startups grew from 3.5 million in 2019 to 4.4 million in 2020, a 24 percent increase," the Peterson Institute for International Economics (PIIE) noted earlier this year.

The surge has continued since then. According to the Census Bureau, startups for November 2021 were up 8.9 percent over November 2020, and business launches for that month were already up 35 percent from the previous year. That is a lot of entrepreneurial activity for a country in which, not too long ago, economists worried about Americans' loss of interest in working for themselves.

"No matter what measure of entrepreneurship you use, the underlying trend is the same: downwards," Wim Naudé of the Maastricht Economic and Social Research Institute on Innovation and Technology at United Nations University wrote in October 2019 as a certain coronavirus lurked in the wings. "For instance, measured as the ratio of new firms (those younger than one year) to total firms, then entrepreneurship in the US declined by around 50% between 1978 and 2011. In terms of the share of young firms (those younger than five years), entrepreneurship declined from 47% in the late 1980s to 39% in 2006."

Economists argue over the reasons for the decline, citing causes including aging populations and "zombie firms" that discourage competition by dominating markets through government favor rather than efficiency. Of course, it's worth asking business owners what hurdles they encounter; they often point to red tape.

"Last month, respondents to an annual National Federation of Independent Business (NFIB) survey told the organization that the single most important problem they faced involved government regulations and red tape," I wrote in 2015. "In July, 'regulatory burdens' ranked among the 'three most significant challenges to the future growth and survival of your business' named by respondents to a similar Small Business Association survey."

To this, you might add a population that's grown risk-averse and comfortable in a remarkably prosperous society that satisfies many people's desires with minimal effort.

"These days Americans are less likely to switch jobs, less likely to move around the country, and, on a given day, less likely to go outside the house at all," Tyler Cowen wrote in his 2017 book, The Complacent Class. "For instance, the interstate migration rate has fallen 51 percent below its 1948 to 1971 average and has been falling steadily since the 1980s. There has been a decline in the number of startups, as a percentage of business activity, since the 1990s."

This, of course, is where things get grim. The arrival of COVID-19 and government-imposed lockdowns, business closures, and social distancing disrupted economic activity and human lives. People who were perfectly comfortable in salaried jobs suddenly found themselves wondering about the source of the next paycheck. The complacent class became the desperate class.

"Many of these new entrepreneurs are self-employed and were likely laid off and forced into entrepreneurship by necessity," PIIE's Simeon Djankov and Eva (Yiwen) Zhang noted when they revisited the burst of entrepreneurship in May 2021. "The authors calculate that firm births may have surpassed firm deaths during the pandemic."

Data from the Kauffman Foundation indicate that the percent of new entrepreneurs who created a business by choice instead of necessity dropped from 86.86 percent in 2019 to 69.75 percent last year. Many people happy to work for somebody else were pushed into starting a business by pandemic-era chaos.

But a lot of those people seem to have discovered that they actually like working for themselves, and that may be causing a cultural shift. At the end of November, The Wall Street Journal reported that at least part of the "Great Resignation" phenomenon of Americans quitting jobs involved people starting businesses.

"The move helps explain the ongoing shake-up in the world of work, with more people looking for flexibility, anxious about covid exposure, upset about vaccine mandates or simply disenchanted with pre-pandemic office life," the Wall Street Journal's Josh Mitchell and Kathryn Dill observed.

Add to pandemic policies and the grind of institutional life the disengagement some workers feel from politicized employers. 

"If you work for a company that engages in political gestures that you think are silly, why care?" economist Arnold Kling observes about much of the public's dismissive reaction to "woke takeovers" of employers. "You work remotely and you have your own side project that you're passionate about." 

That side project may be launching a business from the home office in which you work anyway.

"A new type of career path has emerged, with half of the Gen Z [age 18 to 22] talent pool actually choosing to start their careers in freelance rather than full-time employment," Hayden Brown, Chief Executive of Upwork, which connects freelancers with clients, told the Wall Street Journal.

That's not to say, though, that the current surge in entrepreneurship is a permanent change. Even if people maintain their new disdain for institutional workplaces, lingering pandemic mandates, and politicized employers, the challenges to which small businesses have pointed for years remain daunting.

"These barriers haven't gone away," Victor Hwang of Right to Start, which advocates for entrepreneurs, wrote last week. "They include access to capital, government fees and licensing requirements … Those barriers are pervasive, formidable, and costly. What's more, they inhibit the startup growth that would enable the U.S. economy to thrive."

Those hurdles need to be cleared away before we can be confident that Americans will retain their renewed interest in escaping ossified, politicized employers so that they can seize opportunity and take charge of their own fates.