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WIndicators Volume 5, Number 1: The Rise Of Entrepreneurship During the Pandemic

OVERVIEW

Entrepreneurial activity increased sharply in Wisconsin in 2020 and 2021 during the COVID-19 pandemic. Entrepreneurship is a key part of any healthy economy but ensuring that new business activity leads to significant economic impact by creating high quality jobs can be difficult. Communities can take a lead role in a range of strategies that help entrepreneurs grow and be successful to make the most of this opportunity to improve their economies.

KEY POINTS

  • In Wisconsin, business applications reached the highest level on record during the pandemic.
  • Business applications increased by 21% from 2019 to 2020 and 23% from 2020 to 2021.
  • A small share of business applications will result in actual new businesses with paid employees.

Start-up activity accelerated during the pandemic across the U.S. In Wisconsin, business applications per month reached the highest level on record (Figure 1). From 2004 through 2019, Wisconsin averaged 3,175 applications per month. During the pandemic, from April 2020 through December 2021, applications increased to 4,716 applications per month. In total, there have been more than 136,778 new applications since the beginning of the pandemic, signaling the largest surge of entrepreneurship in at least 15 years.

FIGURE 1: TRENDS IN BUSINESS APPLICATIONS IN WISCONSIN, BY TYPE (2004-2021)

The data on business applications measures applications for an employer identification number (EIN), which is like a social security number for businesses. An EIN is necessary for a business with employees to file payroll taxes, but even businesses without paid employees may find it useful or necessary. For example, certain business functions, such as opening a business bank account, may require an EIN. Importantly, not all EIN applications will lead to fully formed businesses. Rather it is an early indicator of an intention to form a business. We address the question of how often business applications translate to actual business formations in more detail below.

We might have expected uncertainty about the pandemic and its effects on employment, income, healthcare, and safety to have stifled entrepreneurial activity. Entrepreneurship, which is already seen as risky, could have appeared even more so during the global COVID-19 pandemic. As more people stayed at home, businesses and business owners were introduced to additional constraints, changing processes, and shifting consumer demand. These challenges were costly for existing business owners and likely discouraged some new entrepreneurs. Indeed, self-employment declined precipitously during the early months of the pandemic, especially among people of color (Fairlie, 2020). However, as the pandemic continued on, it appears that entrepreneurship became an even more appealing option than it was prior to the pandemic. By the summer of 2020, start-up activity began to increase nationally, perhaps signaling desperation from the unemployed, shifting preferences towards flexible work, or newfound motivation to pursue a venture of one’s own. This change in start-up activity may have been further buoyed by income from economic stimulus and unemployment benefits.

While the exact factors that contributed to the surge of entrepreneurial activity are still unclear, the economic impacts of entrepreneurship, historically speaking, are already known. Entrepreneurship is an important driver of economic growth and development as it ushers in lower-cost methods of production, raises income, and accelerates job creation (Center for American Entrepreneurship, 2015). Getting a more in-depth understanding of how business application trends have been influenced by the pandemic and the recession that followed can help policymakers, economic analysts, and entrepreneurs better prepare for future economic downturns. In this WIndicator, we look at how business application trends in Wisconsin have changed with the COVID-19 recession. We also compare Wisconsin trends to data in similar midwestern states, and consider application data at the county level.

COMPARING ACROSS STATES

In Figure 2, we look at the overall increase in business applications for select states in the Midwest region for the two years of the pandemic. In Wisconsin, applications for employment identification numbers – an early indicator of new business activity – increased by 21% from 2019 to 2020. Start-up activity similarly increased in neighboring states ranging from 9% in Iowa to an over 47% increase in Illinois. Between 2020 and 2021, business applications increased again in every state, including Wisconsin. In fact, in Wisconsin the rate of increase from 2020 to 2021 of 23% was greater than the increase during the first year of the pandemic.

FIGURE 2: PERCENT CHANGE IN BUSINESS APPLICATIONS BY STATE (2019-2020 VS 2020-2021)

In Figure 3, we again compare business applications across states during the pandemic but on a per capita basis—accounting for the vastly different populations of the states in the region. In this figure, we see that application rates in Wisconsin increased from each year to the next, starting at 7.5 applications per 1,000 people in 2019 and subsequently increasing to 9.1 and 10.8 in the following years [1]. The increase in business applications in Wisconsin is impressive, but business application activity increased across the country. In comparing business applications in Wisconsin to other states in the region (after controlling for population) we see that the increase in Wisconsin is similar. The rate of new business applications per capita started higher in Illinois and Michigan and grew by a greater amount. In Illinois and Michigan, business applications increased from around 9 applications per 1,000 to greater than 14 per 1,000 by 2021. Indiana reached a higher rate of business applications as well, increasing from roughly 8 to 13.1 business applications per 1,000 people. Minnesota was most similar to Wisconsin and Iowa trailed the rest of the group.

FIGURE 3: BUSINESS APPLICATION RATES PER1,000 POPULATION BY STATE (2019, 2020, 2021)

A Unique Recession

Interestingly, the rise of entrepreneurship during the pandemic and ensuing economic downturn is unique compared to past recessions. Most recessions feature individuals who are low on cash and have difficulty accessing credit (Economic Innovation Group, 2021). For example, people in 2008 were constrained financially as homeowners faced unfavorable terms on their mortgages, unemployment increased, and savings account balances fell (Singh, 2021). This likely prevented aspiring entrepreneurs from having the confidence and financing necessary to start a business.

During the 2020 recession, although hardship and uncertainty existed, individuals were better positioned to start businesses that took advantage of new opportunities. Nationally, most business applications were in the online retail sector (USAfacts.org) likely in response to the rapid increase in online purchasing behavior. Financial markets also remained relatively strong and stimulus payments and unemployment benefits put households in a different financial situation than they had faced in the Great Recession. The pandemic also caused many to look at their lives differently and, in particular, fueled the desire for new work situations as evidenced by a large number of resignations in recent months. The COVID-19 pandemic may have inspired many individuals to pursue entrepreneurship (Economic Innovation Group, 2021).

BUSINESS FORMATION

While the total number of business applications gives a sense of overall entrepreneurial activity, not all applications result in a business formation (defined as a business that pays wages to at least one employee). Instead, only a small number of businesses are considered likely to become operational and an even smaller number actually do.

Returning to Figure 1, we show for Wisconsin from 2004 to 2021 total business applications as well as business formations that occurred within 8 quarters of the month when the business application was submitted. Looking at these trends helps to illustrate the differences between how many applications are submitted and how many of those applications form into operating businesses.

The difference between the number of total applications and the number of actual business formations is quite telling. The rate of formation for each year is low compared to the number of applications to start a business. On average over the period from 2009 to 2021, roughly 12% of business applications resulted in a business formation within eight quarters. In January of 2008, the total number of business applications was 3036, while the number of business formations was 425, a 14% formation rate. In January of 2020, the number of total business applications was 3483 and the projected number of total business formations was 375, an 11% projected formation rate.

The recent period of business activity may thus be characterized by a much higher level of applications but lower rate of resulting business formations. The result is an increase in business formations, though a smaller increase than the overall increase in applications would suggest. Indeed, there is evidence to suggest that during the pandemic the rise in business applications is more likely to result in more non-employer firms than employer businesses (Economic Innovation Group, 2021). So, while some of these applications may result in small sole proprietorships, bigger businesses with paid employees are less common.

COUNTIES WITHIN WISCONSIN

Much like there is state-level variation in start-up activity, within Wisconsin the increase in business applications varied by region. In Figure 4, we show business applications per 1,000 population at the county level in 2020. Darker shading shows a higher number of applications and lighter shades showing fewer.

Of the 72 counties in Wisconsin, the minimum application rate was 3.85 applications per 1,000 population in Rusk County. Dane, Columbia, and Milwaukee County provided the highest number of applications per 1,000 population with 9.89, 14.53, and 17.20 applications per 1,000 population, respectively. On average, the state had 6.91 applications per 1,000 people. The more rural counties in the north-central areas of Wisconsin had fewer applications per 1,000 people, which may be explained by relatively thin rural markets, a different age demographic, difficulty with remote work, and the industrial composition of the area, among other factors.

In Figure 5, we show the percent change in business applications per 1,000 population between 2019 and 2020. Looking at the change in applications between 2019 and 2020 provides a perspective on how the pandemic affected applications.

The counties with lighter shading had a lower change in applications rate, while the counties shaded in red had a higher percent change. The county with the most significant decrease was Rusk County, with a 38.3% decrease in applications per capita. The county that presented the greatest change in applications per capita was Forest County with a 107.6% increase. In general, however, most counties showed smaller positive changes. The median change in applications per 1,000 population in between 2019 and 2020 was 9.14%. This finding is consistent with the increase in total applications for Wisconsin during 2020 shown in Figure 1, Figure 2, and Figure 3.

FIGURE 4: WISCONSIN BUSINESS APPLICATIONS PER 1,000 POPULATION COUNTY LEVEL (2020) 

FIGURE 5: WISCONSIN PERCENT CHANGE IN BUSINESS APPLICATIONS FROM 2019 TO 2020 PER 1,000 POPULATION AT THE COUNTY LEVEL 

CONCLUSION

Entrepreneurial activity accelerated during the pandemic. The number of individuals filing business applications has increased across the U.S., with Wisconsin showing a similar rate of increase as its fellow Midwestern states. In Wisconsin, total business applications increased by more than 20% in each of 2020 and 2021, resulting in the highest years on record. This stands in contrast to the last economic downturn when startup activity was relatively stable. Within Wisconsin, most counties saw an increase in application activity, though there was a high degree on variation. On average, by county, business applications increased by close to 10% during the first year of the pandemic.

An important point to keep in mind is that, currently, only a small percentage of business applications actually yield businesses that pay wages to employees. Better understanding what leads a business application to come to fruition may therefore be a benefit to local governments seeking to promote entrepreneurialism. In order to make the most of the surge in business application activity, it is important to identify strategies to help entrepreneurs successfully form their businesses. These strategies may include:

  • Investment in broadband infrastructure and adoption as much of the new business activity is in online retail.
  • Training, especially for online marketing, retail platforms, shipping, and logistic support.
  • Network development and community support programs that facilitate peer-to-peer learning and opportunities for entrepreneurs to share their needs and access business services.
  • Expanding childcare as entrepreneurs face many of the same challenges wage-and-salary workers face in accessing affordable, high-quality childcare.
  • Programs tailored specifically to sole proprietors who have no employees as many new entrepreneurs fall into this category. This may mean focusing on challenges related to working from home, accessing small loan amounts, increasing visibility with community leaders and consumers, and accessing markets.

In sum, the recent increase in entrepreneurial activity presents an exciting opportunity for Wisconsin. Communities are poised to realize the benefits that come from entrepreneurship including job growth, income growth, poverty alleviation, and economic stability, not to mention the important role entrepreneurs play in cultivating community identity and rural quality of life. Those communities wanting to leverage the recent growth of entrepreneurial activity can consider a range of possible strategies to do so.


Endnotes

[1] 2019 and 2020 population data come from the Bureau of Economic Analysis whereas 2021 population figures come from CDC population projections.


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Funding Statement

This work was supported by a grant from the United States Department of Commerce Economic Development Administration in support of Economic Development Authority University Center (Award No. ED16CHI3030030 and ED21 CHI3030029). Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the U.S. Department of Commerce Economic Development Administration.

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