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.
