What will the pandemic mean for the composition of our economy?

This paper from the Federal Reserve Bank of Atlanta is an interesting signal for determining what happens to the economy post-pandemic. It shows a sharp recovery in the starting of new businesses – and when compared to the Great recession this really is evidence of resilience – but! – and this may be a marker of something different happening here – that transition rate, the rate at which business transform from non-employer to employer businesses – seems to be dropping. The new companies are non-employer companies (i.e. self-employed in many cases). The graph in the paper hints at this:

So what can we say about this economy? We could form a number of hypotheses. The paper points out that we see a rise in employer startups, i.e. new companies that are formed with employees, but a slow down in the transition of existing business expanding. A way to interpret that is to say that companies that are surviving the pandemic are hesitant to move to expanding and employing people, even though more people start companies and there are more new employer start ups.

This may be fine, and could change as the situation is normalized. The question is what happens to these non-transition companies when there is a contraction of credit down the road, will they stay non-employer businesses? The impact on a coming credit contraction is discussed in another paper from the same bank where the prediction is that we are unlikely to see a “time bomb”-effect in the SME-space. Taken together, however, the papers suggest that there are alternative scenarios where the pandemic may slow down transition rates for a decade or more, leaving new employment not to transitioning business growing, but to new start up employers.

There is probably a lot more here to dig into, but these two papers suggest a few components of scenarios for the post-pandemic composition of the economy.

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