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March 05, 2023 | Tom Ballard

Fed Bank of Richmond issues brief on importance of start-ups to economy

Economist Chen Yeh ponders whether the four decade decline in entrepreneurial activity has been reversed as a result of COVID-19 or temporarily stopped.

The Federal Reserve Bank of Richmond recently issued an Economic Brief titled Why Are Start-ups Important for the Economy?

Written by Chen Yeh, the brief notes that “start-ups come in all shapes and sizes,” but they were classified more than a decade ago into two types:

  • Subsistence entrepreneurs: people starting businesses meant purely to provide subsistence income; or
  • Transformational entrepreneurs: people who aim to create large, vibrant firms and provide jobs and income for other individuals, typically by providing a new good or service or by entering markets previously unserved.

The author notes that the “prevalence of start-ups in the U.S. economy has been falling over the past four decades. In particular, the start-up rate has declined substantially. Yet despite the economic turmoil associated with the COVID-19 recession, the number of EIN (Employer Identification Number) applications surged during the pandemic. In turn, this has been followed by a substantial amount of establishment openings and job creation, presenting a clear break from the secular decline in business dynamism.”

Yeh concludes with a fundamental question: was the decline in entrepreneurial activity reversed by COVID-19 or was it a temporary uptick that will not last?

The brief can be found here.


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