Applications for new businesses seeking to hire workers have surged this year to their highest point since 2007, according to the Census Bureau, a development that has surprised economists and suggests that jobless workers are looking to entrepreneurship to stay afloat.
Between the first and second quarters of 2020, over 1.7 million business applications have been filed. Of them, roughly 1 million seek to open a business that will hire staff.
“It’s a step in the right direction,” said John Haltiwanger, a professor of economics at the University of Maryland and a research associate at the Census Bureau.
Haltiwanger said that it was too early to tell whether the increase in applications would translate into sustainable businesses and jobs.
Applications have increased both for sole proprietorships, which don’t plan to hire workers, and employers, who plan to take on staff.
Economists mostly credit the increase in applications to the conditions created by the mass layoffs caused by the pandemic.
“A lot of these new business applications are what is referred to as ‘entrepreneurship of necessity,’” said John Dearie, president of the Center for American Entrepreneurship, a nonpartisan research, policy, and advocacy organization for startups.
“In other words, a lot of people are starting new businesses because they lost their job,” he added.
Dearie noted that the number of applications for sole proprietorships is far higher than those for employers, which indicates that jobless workers are venturing out on their own since they can’t locate work.
“You might well see an uptick in new business formations, which, on the one hand, is good and encouraging and good for the economy, but it is happening for bad reasons,” he said.
Haltiwanger said that many of the applications for sole proprietorships are probably temporary.
“People who lost [their] jobs are looking to do a stop-gap … This isn’t their new career,” he said.
One reason for optimism, though, is that there was not a corresponding boom in business applications during the last economic upheaval, the Great Recession of 2007-2009.
“Unlike the Great Recession, where we saw a big decline in applications … here, we’re seeing a surprising surge in applications … We’re actually ahead of every year all the way back to 2007, which is remarkable,” Haltiwanger said.
Still, more businesses have likely closed than have been created since the start of the pandemic, Haltiwanger noted. “We’re starting to claw back, but we’re still in a big hole,” he said.
Katherine Smith Evans, a director for government relations at the American Economic Association, said the increase in applications is “not necessarily” an indication that the economy is improving, but it could suggest that entrepreneurs think the economy is on the mend.
“If anything, it might be an indication of expectation by entrepreneurs of a recovering economy,” she said.
The Census Bureau gathers information for business applications from Employer Identification Numbers on the IRS Form SS‐4. When an application is completed, it means that a business has been formed. It does not mean that a business has opened and engaged in commerce.
Dearie said it could be too early to say if the increase in applications is good news for the economy since it is unknown how many of these businesses will actually open their doors to customers.
“What this data is referring to is business applications and not business openings … Applications are great, but what really counts is new businesses that form and last, and we just don’t know yet [who will open],” he said.
Business applications were also up 4.8% in the second quarter of 2020 when compared to the first quarter, the Census Bureau reported on July 15.
