The State of Startups: A review of recent research

In a recent economic brief, Why Are Startups Important for the Economy?, the Federal Reserve Bank of Richmond provides a comprehensive review of the current literature around startups, their impact on productivity and job creation rates, and their significance in the U.S. economy.  

Startups’ contribution to aggregate job creation have led them to be dubbed "the engine of economic growth,” according to the 2013 study Who Creates Jobs? Small Versus Large Versus Young. Recently, however, researchers have noted a steady decline in startups and startup rates over the past four decades. Reviewing existing research on this topic, the brief identifies three possible explanations for the decline: a decreasing population growth rate, a rise in the market power among incumbent firms, and a declining intensity of knowledge diffusion from industry leaders to new entrants.

One possible silver lining that could represent a departure from the startup slowdown is the surge of new business formations since the start of the COVID-19 pandemic as measured by applications for Employer Identification Numbers (EINs). While not all EIN applications result in companies that hire new workers (and therefore create new jobs), the brief points to a 2022 report (Surging Business Formation in the Pandemic: Causes and Consequences), which argues that not only did the number of total EIN applications rise overall, but that there was also a sizeable increase in the number of “likely employer” applicants, based on data from the U.S. Census Business Formation Statistics.

Further research is needed to fully understand the implications of this surge and whether it represents a long-term trend.