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Business Formation: A Tale of Two Recessions

Working paper by John Haltiwanger, with Ermin Dinlersoz, Timothy Dunne, and Veronika Penciakova

In a new working paper, Dr. Haltiwanger and colleagues point out that the trajectory of new business applications and transitions to employer businesses differ markedly during the Great Recession and the COVID-19 recession. They conclude, "Our  findings  show  that  the  trajectory  of  business  applications  and  transitions  to  employer businesses differ markedly during the Great Recession and COVID-19 Recession.  The persistent reduction in actual employer business formation during the post-Lehman crisis period of the Great Recession is primarily accounted for by a decrease in applications, as transition rates to employer businesses recover after an initial decline. In contrast, during the COVID-19 Recession new applications initially declined but have since sharply rebounded, resulting in a surge in applications during 2020. Although our analysis predicts a rise in employer startupsin 2020 relative to 2019, this rise is dampened by a reduction in the projected transition rate of applications to employer businesses.  Compositional changes in applications underlie this reduction, including a decrease in the share of applications with intent to pay wages and an increase in the share of applications in industries dominated by non-employers (e.g., non-store retailers).  These compositional changes suggests some caution regarding the observed surge in new applications in 2020 in terms of their implications for new employer businesses. On the other hand, the surge in applications of likely non-employers in 2020 has been quite dramatic."

See the working paper

Ermin Dinlersoz, Timothy Dunne, John Haltiwanger, and Veronika Penciakova (2021). "Business Formation: A Tale of Two Recessions". Federal Reserve Bank of Atlanta Working Paper Series, 2021-05.