Humans typically respond to large unforeseen shocks in two ways. Either they withdraw from risk-taking as we saw after the Great Depression, which led to the creation of the modern welfare state and a generation that feared the stock market, or they accept that risk is part of life and they learn to embrace it, as they did in the roaring twenties after the 1918 and 1920 flu recession.
So far it looks like we’re going with the 1920s, at least from an economic risk perspective. Entrepreneurship rates rise.
It might seem counterintuitive. After all, last year was exceptionally hard for small businesses, which led many to close. But the number of new business applications from the U.S. census has increased by 38% compared to the year before the pandemic. Nothing like this happened during the Great Recession or the like point. The census classifies two types of business applications: those that are likely to grow and hire other people (called high propensity applications) and companies that will remain small and limited primarily to their founder.
The latter dominates the “all kinds of applications” category and can include things like consulting, contract work, or small-scale catering. Economist John Haltiwanger delved into the data and estimates that most new firms are likely to stay small and not hire more workers, although application rates are rising for both types of firms.
Haltiwanger estimates that most of the new applications are in certain industries: retail, food, professional, scientific and technological services. There is more growth in Texas, Georgia and Florida compared to New York and California.
Could it be the return of a risk-taking economy? There are reasons to think not. Both large-scale and small-scale entrepreneurship have their benefits, but they also pose more risk, as remuneration and benefits are more uncertain, especially for the self-employed. A lot of people lost their jobs last year and maybe started a business because they had no choice. They may prefer the stability of regular employment once they find work. Another reason why it could be a temporary mistake is the CARES law, passed last year, which may have facilitated entrepreneurship. One study estimates that stimulus controls boosted entrepreneurship by providing some needed money, especially for minorities.
However, there are other reasons that make me optimistic, which could be the start of a long-term trend, and which we should be grateful for. The nature of work always changes. Before the industrial revolution created the factory model, it was common to work independently from home. Maybe we’ll go back.
Even before the pandemic, there was reason to think that the traditional employer / employee model was not necessary for the new economy. Technology makes the concert or contract easier because it’s easier to find clients and work for people far away. The work has also been standardized. Consider, for example, that everyone uses the same word processing software. This makes consulting and hiring work more viable because you can support multiple clients. Despite these major technological changes, self-employment and contract work had not been of great importance in recent decades.
It could be now. The pandemic forced everyone to adopt new technologies and rethink their work, and it is possible that it has accelerated these long-term trends. Many people have enjoyed working from home and having more flexibility. But that may not fit with traditional employment once we get back to normal. Employers already demand that people return to the office and insinuate (strongly) that while working from home may be an option at least sometimes, it will indicate to you that you are less dedicated and committed to your job. If people want to continue working remotely and crave more flexibility, their contract, concert or consulting may be their best option.
Another reason to believe we are in a more entrepreneurial economy is that the number of business applications continued to rise this spring, even as the economy opened up and wages rose. The fact that there are more new business applications in states that reopened more quickly suggests that easing economic constraints may lead to even greater entrepreneurship. Or it could reflect the start of a new kind of economic classification in the United States, where those who take risks who want to be entrepreneurs are grouped into states where financial and health uncertainties are more tolerated in exchange for fewer regulations and lower taxes. .
The coming years will reveal the meaning of these trends and whether they indicate a new way of working. But there is one last consideration that suggests that at least part of the entrepreneurial boom will recede: so far the Biden administration has not embraced independent work. It favors more unions and forces companies to classify contractors as employees. This is seen as a good way to protect workers from undue risks. But if people prefer non-traditional work (and many do), the government should not fight it and instead look for ways to make self-employment less risky, including by offering better health care options and of retirement benefits.