HBRThe Covid-19 pandemic triggered an unexpected boom in entrepreneurship, as Americans opted to start businesses at record rates. Just as unexpected has been the boom’s durability. Would-be entrepreneurs have proven to be undaunted by recession fears, labor and supply-chain constraints, the highest inflation rates in a generation, and rapid interest rate hikes. In October 2023, over three and a half years after the pandemic’s onset, Americans were still filing 59% more applications to start new businesses than they were before the pandemic. The resurgence is all the more remarkable given how deeply startup rates and other measures of economic dynamism languished at or near all-time lows throughout the 2010s.

Thus, one of the most intriguing questions facing the U.S. economy right now is whether the pandemic has durably shaken the country out of its entrepreneurial slump. The answer to this question matters inordinately to the health and direction of the economy in the years ahead, affecting everything from job growth to productivity. And answering it requires digging into three things: what’s driving the boom, how economically significant it may be, and what policymakers can do to sustain it.

Why startups matter
Startups matter for a whole host of reasons, but the two most immediate and tangible are job growth and productivity. The number of startups launched in any given year is a determining factor behind the extent of net job creation across the economy. On average, in most years employment gains from expanding incumbent firms will be offset by losses at downsizing ones. The increase in net job creation comes from high-growth young firms.

Startups also drive productivity growth — another economic indicator that has started to revive after a long slumber, with blockbuster data just released for the third quarter of 2023. Startups drive productivity because they adopt and commercialize new technologies, adapt old and introduce new business models, advance innovation, sharpen competition, and simply make better use of the economy’s resources — including its people — than market incumbents.

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