The pandemic and associated lockdowns have hit new businesses hard. According to new research by Cristiana Benedetti-Fasil (Joint Research Centre of the European Commission), Petr Sedláček (University of New South Wales and Oxford University) and Vincent Sterk (University College London), even if the disruption to startups is short-lived, it could lead to large aggregate employment losses, which may last for more than a decade.

The consequences could be highly damaging, their study warns. Even though startups account for only a small fraction of all businesses, they are a key force of economic growth and job creation.

The authors develop a ‘Startup Calculator’ for the United States and 23 European economies. With the calculator, which is available online, anyone can simulate different scenarios of the pandemic’s impact on young firms. How much will startup activity drop? By how much will lockdowns affect business closures? Will there be a strong rebound in the coming years? And with what growth potential will new firms come out of the pandemic?

The calculator takes these aspects as inputs and, using aggregated firm-level data from Eurostat and the Census Bureau in the United States, computes the implied evolution of aggregate employment for the next ten years.

More…

The focus on startups and young businesses is driven by their dominant role in creating new jobs. For example, over the past three decades, the US economy created on average almost 1.5 million new jobs each year. Strikingly, startups alone create almost three million new jobs annually.

Of course, these numbers hide a large amount of simultaneous job creation and destruction. But they do highlight that startups are the only group of firms that creates a net amount of new jobs, while all other existing businesses destroy jobs on average.

That said, young businesses are also risky. The average rate at which they shut down is almost three times as high as the economy-wide average in the United States. On the other hand, young firms that do survive tend to grow faster than the average existing business. And it is this firm and job churn – so-called ‘up-or-out’ dynamics –which has been linked to productivity-enhancing reallocation.

But it’s not only about numbers of startups and young firms. Previous research by Sedláček and Sterk has shown that firms born during recessions not only start smaller, but they also tend to remain small in future years, even if the rest of the economy recovers. These differences in growth potential can then create a persistent drag on the macroeconomy.

The results from several different scenarios show that even short-lived disruptions to startup activity can lead to large employment losses that last for more than a decade. But institutional differences and the speed of business dynamism across countries play important roles.

For example, employment in Germany, which is characterised by relatively low business dynamism and in which startups were hit relatively less severely, is estimated to fall by less than 1%. In contrast, the US economy was simulated to experience a more than 1.5% decline in employment, which does not subside even by 2030.

The Startup Calculator, therefore, highlights the extent and the different reasons for why recessions are bad news for the economy. In particular, they are times when more young businesses shut down, few startups find it worthwhile to enter and those that do start up tend not to perform as well as their counterparts born in booms. The simulated recession scars left by the pandemic may be large and persistent.

Further information:

https://voxeu.org/article/startup-employment-calculator-covid-19

---

‘Startups and Employment Following the Covid-19 Pandemic: A Calculator’

Authors:

Cristiana Benedetti-Fasil (Joint Research Centre of the European Commission)

Petr Sedláček (University of New South Wales and Oxford University)

Vincent Sterk (University College London)