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A Hamilton Project analysis of the business sector during Covid-19 shows that despite fears of an initial expansion failure, existing businesses and new entrepreneurship are defying earlier expectations, with around 450,000 more establishments by the end of 2021 than before the pandemic.
Underneath these cumulative effects, patterns across industries show significant economic recovery. A large number of new business ventures have occurred in industries most vulnerable to the pandemic, primarily front-line services such as restaurants. Other new business activities, such as online retail and data services, reflect new opportunities with the shift to remote locations. This report traces the employment implications of this boom to determine the impact of the initial job losses and recent recovery on businesses of various sizes. While questions remain about the contribution of these new dynamics to entrepreneurship and productivity, the persistence of these shifts and the resilience of small businesses will play a key role in determining the future course of the recovery.
Business survival
Despite an unprecedented number of businesses closing amid Covid lockdowns, new data suggests that most businesses have finally been able to reopen.
Despite an unprecedented number of businesses closing amid Covid lockdowns, new data suggests that most businesses have finally been able to reopen. This was mainly due to the sudden nature of the economic downturn and reopening, and partly due to fiscal support that made household spending more sustainable. Unlike past recessions, business exits are concentrated in the service sector, which accounts for 90 percent of all exits through March 2021. And certain industries have borne the brunt of those impacts, with businesses in leisure and hospitality as well as education and health services seeing nearly 70 percent more facility openings in the first half of 2020 compared to mid-2019.
New business creation
Applications for new businesses began to grow in early 2020, a trend consistent with the relationship between job creation and unemployment during the recession. However, by 2021, those applications have translated into near-record levels of new business innovation. Patterns of new entrepreneurship suggest significant economic recovery due to the pandemic. Many of the sectors that will see new business activity are similar to areas where existing businesses will experience sharp declines in revenue and higher exits in 2020, including restaurants and personal services. Other emerging businesses, including online retail and data services, reflect new opportunities in the shift to remote locations.
Employment impact
While labor markets slumped in the first wave of business closings, 86 percent of lost jobs in the second quarter of 2020 were due to contracts between businesses. Those wage contracts were mainly run by large firms with more than 50 employees. In fact, the big companies are slow to recover their previous level of work. In total through 2021, BED data indicates that nearly 450,000 more establishments opened than closed since the beginning of 2020, and these new businesses contributed a net 500,000 jobs to the recovery. In particular, new business creation has been a key driver of job creation in the last three quarters of 2021, with new establishment births averaging 1 million new jobs.
While the report shows a strong recovery in the business sector, future job creation and productivity growth will depend on the continuity of pandemic-related jobs and lifestyles and the ability of these new businesses to remain viable.
The Brookings Institution is funded by a variety of foundations, corporations, governments, individuals, and grants. A list of donors can be found in our annual reports published online here. The findings, interpretations and conclusions in this report are solely those of the author(s) and are not influenced by any donation.
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