There have been 700,000 more applications to form a new business in 2020 than at the same point in 2019, concentrated particularly in pandemic-affected sectors such as online retail, according to the latest Census Bureau data.
“Applications to form a new business have surged in the second half of 2020, despite widespread business closures in response to the COVID-19 pandemic and the deepest recession in postwar U.S. history,” concluded a Penn Wharton Budget Model analysis of business formation data. The model is a research project at the University of Pennsylvania.
The Penn model projects that the new business applications in 2020 will result in 120,000 additional jobs and 27,000 more businesses formed by the third quarter of 2021.
The third quarter of 2020 had the highest number of employer applications since at least 2004, when the bureau started collecting such data. The new business surge marks a sharp contrast with the Great Recession, when applications plunged.
New business registrations are tracked by applications sent to the Internal Revenue Service for an entity to receive an Employer Identification Number. Obtaining one is typically the first step in the process of forming a business and is needed to pay payroll taxes.
Most new business applications do not lead to actual hiring, the Penn analysis showed. Only 9% of new business applications form an employer business that hires within one year. There may also be a lag between an application for a new business and the actual formation of an employer business.
Nevertheless, business startups play a critical role in overall job creation. The Penn analysis shows that in most years since 1980, existing businesses have lost jobs in aggregate, either through businesses shutting or reductions in employment levels, while startups create the jobs that drive growth in overall employment.
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