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Is the entrepreneurial surge for real?

Did the surge in new business applications lead to a subsequent surge in new employer businesses? Based on data from the U.S. Bureau of Labor Statistics Business Employment Dynamics (BED) and U.S. Census Bureau Business Dynamics Statistics (BDS) programs, we find that employer entry did rise in North Carolina over the past few years, with firm births rising across multiple sectors. However, these recent trends must be viewed in the context of a multi-decade decline in business dynamism.

Author: Jonathan Guarine

The COVID-19 pandemic set off an unprecedented surge in new business applications in North Carolina. Even more remarkable has been the durability of this entrepreneurial surge. Against the backdrop of decades-high inflation, rising interest rates, and widespread recession fears, North Carolinians have continued filing applications to start new businesses at a record pace. In 2023, business applications were 64% higher than in 2019.[1]

This durable surge augurs well for an entrepreneurial resurgence, but it also raises several questions regarding its economic impact.

Is the entrepreneurial surge for real?

In other words, has the increase in new business applications led to employer business startups? Indeed, not all applications transition into actual businesses with paid employees, as many endeavors inevitably fail to take off or have little intention of hiring workers. Even among eventual employers, there can be a lag between applying and becoming operational.

Previous research has found that new employer entry followed the early pandemic burst of business applications across the United States. Similarly, our findings suggest that for North Carolina, the surge in application activity led to an uptick in employer entry.

In 2023, more than 16,000 new firms were born in North Carolina, a sharp 41% increase in the three years following the COVID-19 recession, compared to the 32% growth in the nine years following the Great Recession [Figure 1].[2] It’s important to emphasize that these new firms represent genuine new businesses and not simply expansions of existing businesses, such as a new Starbucks or Walmart location.[3]

At first glance, it does appear the entrepreneurial surge is legitimate and not merely indicative of fleeting entrepreneurial aspirations from early in the pandemic. However, as we’ve cautioned before, more years of data are needed to fully understand the extent of new employer formation.

Figure 1

New firm births indicate actual employer formation in North Carolina

Has increased employer entry been evident across industries?

Another pertinent question is whether the increase in employer formation has been broad-based or confined to specific industries. Most major industries in North Carolina witnessed pandemic-era increases in employer entry. Following the COVID-19 recession, service industries like private Education & Health Services, Information, and Financial Activities led the way in firm creation [Figure 2].[4] Employer entry also picked up in Construction, a goods-producing industry.

The industry patterns of employer entry suggest a blend of both pandemic-era changes and economic/demographic factors. For example, strong population growth and robust construction spending on residential and non-residential structures may be behind the increases in Financial Activities (which includes real estate) and Construction. Growth in the Information and Professional & Business Services industries may reflect increased remote work opportunities, as some economists have argued, along with other “high-tech” innovations in recent years.

The Education & Healthcare Services industry stands out above the rest, with annual firm births far exceeding the pre-pandemic pace. Evidence from the Census Bureau’s BDS data suggests most of the increase stems from the healthcare side of the industry, although the underlying drivers remain less understood.

Overall, the exact factors catalyzing increased firm entry are far from certain. But the entrepreneurial boom appears widespread with many industries seeing a large increase in new employer entry in recent years.

Figure 2

New business creation occurred across multiple industries

Will the entrepreneurial boom reverse the pre-pandemic decline in dynamism?

Lastly, it’s important to consider whether the recent startup surge is the beginning of a renaissance in entrepreneurship and business dynamism more broadly. A review of long-term trends should temper our expectations. 

In the decades leading up to the pandemic, entrepreneurial activity was on a steady downward trend, as evidenced by a secular decline in employer startups that was pervasive across industries. In North Carolina, firm entry—the number of new firms less than a year old as a share of all firms—fell from 13% to 8% from 1978 to 2019 [Figure 3]. Declining dynamism was not unique to North Carolina, as slowing firm entry was universal across the United States.

Figure 3

The pace of business startups has slowed for several decades

A significant reversal of the multi-decade decline in dynamism would require a sustained surge in new employer entry beyond just a few years. Therefore, we can only speculate regarding the broader implications of the recent startup surge. Nevertheless, the fact that new business applications have remained elevated for as long as they have and spurred new employer entry is cause for optimism.

[1] The calculation is based on data from the Census Bureau’s BFS. In 2023, monthly business applications in North Carolina averaged 14,243. In 2019, the monthly average was 8,686.

[2] The data series on firm births comes from the BLS BED program. The BED features an annual (March snapshot) “research” product that quantifies employer firm births, where firms are identified by new Employer Identification Numbers (EINs). Statewide data are unavailable for 2020 and 2021.

[3] In business dynamics parlance, “firms” (or businesses) and “establishments” are distinct. An establishment is a physical location where economic activity occurs. A firm may have one or multiple establishments. Therefore, a new establishment may represent a completely new firm (e.g., a mom-and-pop coffee shop) or an existing firm (e.g., a Starbucks location).

[4] Figure 2 shows annual firm births benchmarked to 2015 levels to compare growth across industries and time.

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