The COVID-19 pandemic has led to widespread disruptions in the U.S. economy, especially in labor markets. In addition to the widely reported rise in unemployment and job losses, there is timely and high-frequency data that shows a significant disruption in early-stage business formation. Using the Census Bureau’s Business Formation Statistics (BFS), which tracks applications for Employer Identification Numbers (EINs) at the weekly frequency, this report explores the link between labor market fluctuations and early stage business formation. We find that changes in employment and labor force participation rates play a fairly limited role in accounting for business formation in “normal” times. Both the employment and labor force participation rates change very slowly and virtually all growth in applications per capita is accounted for by a rise in applications per worker.
During the COVID-19 pandemic, however, labor market disruptions of a truly unprecedented magnitude play a far more prominent role in explaining the collapse of business formation in the US. Typically, changes in the employment and labor force participation rate account for half or more of the observed decline in applications per capita. While there are signs of a recovery in the number of business applications in the second half of May, it is too early to connect these developments to state-level labor market data.
One of our concerns is that a prolonged decline in the labor force participation rate may have a scarring effect on business formation. While this effect is not specific to Wisconsin, it would exacerbate the state’s previously documented lack of business dynamism and the Center is therefore monitoring future labor market and business formation developments closely.
This update to the “Business Formation during the COVID-19 Pandemic” report includes the business formation statistics from calendar weeks 39 through 42 and the state-level labor market data for the month of September. Labor market conditions and business applications are linked using the same accounting approach as the original report and the four previous updates. Two broad trends characterize the evolution of business formation since our previous update. First, the strength of the rebound is gradually losing steam, but continues above trend compared to previous years. The recovery is broad-based in that applications exceed the levels of prior years in virtually every state. Moreover, the recovery encompasses the more promising “high-propensity” applications. Thanks to this fairly sustained uptick in applications the cumulative number of applications through week 42 is exceeding comparable year-to-date numbers in previous years by a significant margin. Barring a sharp contraction in the flow of applications later this year, full-year totals are likely to exceed the levels from prior years. Second, the rise in applications can be attributed to a sustained rise in the number of applications per employed worker, rather than significant improvements in local labor markets. In fact, the labor force participation and employment rates for September continue to be weak by historical standards, but marginally improved compared to August. With the exception of Michigan and Indiana, all Midwestern states made gains in the employment rate of approximately one percentage point. The picture for the labor force participation rate is more mixed: Wisconsin’s roughly returned to 2019 levels while Iowa’s gap widened by an additional 0.6 points to -8.5 percent compared to the September rate in 2019.