David A. Price interviews Steven Davis “on remote work, changes in recruiting, and business startups after the pandemic” (Econ Focus: Federal Reserve Bank of Richmond, Fourth Quarter 2022 , pp. 22-26). Here are a few of his comments that caught my eye:
On the rise in business start-ups since the pandemic
Business formation rates rose sharply in the wake of the pandemic. And that’s after, as you say, a long period of decline. It’s also entirely unlike the U.S. experience during and after the Great Recession of 2007 to 2009. Business formation rates tanked in that recession, they were very slow in recovering, and then they resumed a long downward slide. Something quite different happened in the wake of the pandemic. In my view, there are three forces at work.
First, the pandemic was a major reallocation shock. What I mean is that there was a big shift from spending at bricks-and-mortar retail outlets to online shopping, a shift from dining in restaurants to takeout and meal delivery, a lot of experimentation with remote delivery of health care and other services. There was a lot of reallocation across activities, often within industries, but just providing the same kinds of goods and services in different ways. There was also a big geographic component to this reallocation. Workers and businesspeople now spend a lot of dollars in different places than before the rise of remote work. …
The second force is that household balance sheets are in much better shape than they were after the Great Recession. Not only that, they’re in great shape by the standards of recent decades in general. That’s for several reasons. First, in the wake of the pandemic, we had a housing market boom as opposed to the bust we had in the 2006-2010 period. Instead of a stock market crash, the market rose — at least until fairly recently. So both in terms of home equity values and in terms of financial asset portfolios, households were in good shape. There was also government pandemic relief — really enormous, unprecedented amounts of cash funneled to households and businesses. All of that left households, including current and prospective entrepreneurs, with the resources and the willingness to start new businesses and to grow existing businesses.
Then there is a third force, perhaps more important in the longer term: Business formation and development costs fell in the wake of the pandemic. Even before the pandemic, it typically was cheaper to start an online business than a bricks-and-mortar business. You don’t need a building or at least you don’t need nearly as much space. You can often start it out of your own home. Online businesses also face lighter regulatory costs and restrictions, partly because they run afoul of fewer zoning and permitting requirements and partly because they can very easily gravitate to business-friendly jurisdictions. … In addition, there have been advances in communication platforms … They make it easier to start a business and to operate a business on a small scale. You can hire somebody who is a hundred miles away to do your bookkeeping for you; you don’t even necessarily need to meet your bookkeeper in person. All of these things make it easier to start businesses in smaller cities and in other out-of-the-way places where it’s harder to get the ingredients of a company together. Now, this third factor is one that, unlike the other two, may well persist indefinitely, leading to persistently higher rates of new business formation.
A dynamic economy and social mobility
Economies that are characterized by a lot of business entry and exit, up-and-out type behavior, also tend to generate opportunities for people all along the earnings distribution. So in economies that are characterized by lots of dynamism and fluidity among businesses and in labor markets, it’s easier to get a job if you want one — and at least get a toehold on what might, with hard work, become a career path, even if you’re somebody who doesn’t have strong credentials at the outset.
If you’re some guy who didn’t really like school that much — you’ve got some basic skills and you graduated from high school — what’s the path to upward mobility for somebody who fits that profile? In the United States after World War II, the answer was often to go get a job in a local manufacturing plant. That rarely happens these days. But you can start a landscaping business or work for somebody else for a couple of years in a landscaping business and then start your own. Or you might become a hairstylist or a tree trimmer or set up your own dog-walking business. There are many ways that the regulatory process can make that easy or hard. Having an economic system that makes it relatively easy to start new businesses and to grow some businesses if you have something to offer to consumers is a good path to upward mobility for a broad population. That’s a positive social consequence of business dynamism.
Missing workers in the aftermath of the pandemic
Millions of people left the labor force in spring 2020 when the pandemic struck. … . It would seem like a simple thing to know exactly how many, but it turns out not to be so easy … [T]he data sources that actually track large numbers of people over time in a way that makes it possible to get a precise answer to this question don’t become available for two or three years after the fact. And even then, they’re hard to access. …
There are a few things going on, but let me mention two that I think are important. One is that there is increasingly good evidence that out of the tens of millions of people who had COVID-19, a small fraction of them have symptoms that endure for months and months. For a portion of that small fraction, the symptoms are severe enough that they really aren’t able to work effectively. You might think well, how can this amount to much? But let’s say you have a hundred million people who had COVID-19 —I’m just going to use round numbers here — and 15 percent of them have symptoms that last a long time. The numbers are in that ballpark. Of that 15 percent, let’s say a third of them, just to make the arithmetic easy, have pretty serious debilitating conditions like shortness of breath or brain fog, that kind of thing. Now we’re talking about 5 million people. Well, you take 5 million people out of the labor force, that’s a reduction on the order of 3 percent. That’s the long COVID impact on labor force participation, which others have worked on.
And then there’s long social distancing, which is the subject of my recent paper with Nick Bloom and Jose Maria Barrero. We provide two kinds of evidence that some people who used to be in the labor force are now staying out of the labor force because they worry about infection risks associated in the workplace or on the commute to and from work. I think both long COVID and long social distancing are part of the story as to why labor force participation rates haven’t recovered fully.