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Business News/ Opinion / Views/  The US economy is dynamic again but it might not sustain
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The US economy is dynamic again but it might not sustain

It may have new businesses to thank but it’s doubtful these will last

More entrepreneurship and business creation is associated with greater job creation and GDP growth, and could be one reason the US economy has been so resilient.Premium
More entrepreneurship and business creation is associated with greater job creation and GDP growth, and could be one reason the US economy has been so resilient.

I am begging for assistants!" my hairdresser complained when I last saw her. As an economist, I immediately made a note to myself: I need to check the latest numbers on business formation.

As it turns out, they are way up since the end of the pandemic—which is an encouraging sign. But it’s too soon to say whether the change will last.

My hairdresser’s complaint is in many ways illustrative. Before the pandemic, her salon was the kind of place new beauty-school graduates would die to work at. Ambitious hairstylists would graduate from beauty school, newly licensed but not especially skilled or connected, and work as an assistant in an established salon. The pay wouldn’t be great, but they’d be trained in the latest techniques, learn salon dynamics, interact with high-end clients and build their resume.

Not anymore. There are still plenty of new beauty-school graduates, but instead of starting out with low-paid apprenticeships, my hairdresser told me, more are striking out on their own. They rent a chair at a local salon, learn the more advanced techniques by watching YouTube or TikTok, and build up a clientele through social media.

It has been almost four years since covid first appeared, and the shortage of workers remains a mystery. Part of it may be that, as my stylist described, more people are working for themselves. The pandemic changed many things about the economy—how we work, where we work and who we work with, for starters—but one of the most striking trends has been a big uptick in entrepreneurship.

A new paper from the Brookings Institution tries to make sense of the trend. In 2020, there was a spike in new business applications. This was not unexpected: Many people were out of work, stuck at home and with checks from the government, so selling goods or services online was a viable way to earn a living. When the economy reopened, business formation rates dropped.

But then, in 2021, they surged again—and business formation has been going strong ever since, even as the economy recovered and amid the tightest labour market in decades. In fact, the paper cites new business formation as one explanation for higher quit rates.

The question is whether this is a reversal of the long-running trend of declining entrepreneurship. For the last couple of decades, despite the rise of the gig economy and all the hype around Silicon Valley, fewer Americans were starting their own businesses or working for themselves. No one knows why exactly. Technology made it easier to find clients or work for yourself—yet few people did, or if they did it was more of a side-hustle.

The pandemic seemed to change that. Maybe it alerted people to the possibilities of working for themselves. The paper notes that many of the new businesses were formed in suburbs and in the South, both places where people moved to. And while most of the new entrepreneurs are expected to operate sole proprietorships, there is also growth in the number of high-propensity businesses—that is, ones more likely to hire employees.

This is a potentially big deal. More entrepreneurship and business creation is associated with greater job creation and GDP growth, and could be one reason the US economy has been so resilient. From a worker’s standpoint, working for yourself can be more rewarding and allow for more flexibility, personally and professionally.

Sometimes it takes a big shock to bring about permanent change. The technology to work for yourself has existed for years, but for whatever reason it failed to catch on. The pandemic could have changed that. Alternatively, this could just be a blip that makes the economy more vulnerable if there is a recession. As one commenter on the paper noted, most of the growth is in small businesses, many of which won’t survive a recession, when there is no worker shortage.

In fact, the data show that many of the new businesses are in the personal services industry, such as my hair salon. Will they be able to survive a recession? Perhaps—but it is harder on your own, especially when you are new to an industry. They missed out on training you can’t get online, such as how to handle difficult clients and keep them happy even when the economy is weaker. They know fewer people who can make referrals. Self-employment may turn out to be a better option for older workers or near-retirees.

No doubt the boom in new business formation is promising. But it probably won’t transform the economy anytime soon. Like working from home, another trend enabled by technology, working for yourself will require a change in culture and norms. And that could take a while. ©bloomberg

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Published: 16 Oct 2023, 05:55 PM IST
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