Worker shortages that are slowing the recovery from the COVID-19 recession largely have been blamed on generous unemployment benefits and people caring for kids and sick relatives.
But there’s another reason companies are struggling to find workers to meet a historic boom in customer demand: Many Americans have started their own businesses.
Entrepreneurs have filed applications to launch firms at a record pace since last summer, and the startup frenzy has accelerated this year. Many of the budding business owners lost jobs because of the pandemic and are looking for new ways to generate income.
Others are drawing on government stimulus checks and soaring home values to fulfill lifelong dreams and make the most of a revived economy that’s expected to usher in the fastest growth in decades as consumers return to dining out, traveling and other activities.
“Demand in the economy has taken off,” says Mark Zandi, chief economist of Moody’s Analytics. At the same time, “a lot of businesses failed (because of the health crisis) and there’s less competition…It’s a very positive backdrop for business formation.”
Stephanie Taylor, 59, of Philadelphia, lost her job as catering director for a bagel shop in March 2020. For a few months, she hoped to get called back while scraping by on unemployment benefits. But by summer, “It wasn’t getting better, it was getting worse,” she says of the pandemic and related business restrictions.
“I always wanted to have my own place,” she adds. “I said, ‘This is the time.’”
Last month, after overcoming several financial and health issues, Taylor opened Welcome Home Café in Jenkintown, about a half-hour south of Philadelphia, offering a menu of homestyle food that’s also healthy.
“It felt great, but it still felt scary,” she says. She wondered, “Are people going to come?”
The surge in business formation underscores that the labor market may be more robust than suggested by average monthly job gains of 418,000 in April and May – half the number economists projected. Analysts largely blamed worker shortages, with a $300 federal supplement to unemployment benefits coaxing some people to stay on the sidelines. Others may be fearful of contracting COVID-19 or caring for children who are distance-learning from home.
The spike in startups represents yet another reason there aren’t enough workers to fill a record 9.3 million job openings.
“It’s contributing to the worker shortages,” says Bob Schwartz, senior economist at Oxford Economics. “A lot of people say, ‘I can do this. Why should I go back to a $30,000-a-year job if I can do better?’”
Yet while entrepreneurs may not be available to join other companies, they are working and generating income. Startups are typically more innovative than established companies, boosting the economy’s productivity, Zandi says. What’s more, they’re employing thousands of workers.
In 2021, about 2.5 million new business applications were filed through May, according to Census Bureau and Moody’s figures, a torrid pace that would result in 6 million applications for the year. That compares with 4.4 million business applications for all of last year, when the startup flurry began, and 3.5 million in both 2018 and 2019.
While this year’s applications encompass all industries, the largest shares are in retail (especially e-commerce); professional services; transportation and warehousing; and construction, according to figures from Oxford and the Census Bureau.
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About one-third of this year’s 2.5 million business applications, or 851,000, indicate the entrepreneurs intend to hire employees – another boon for the economy. Yet the Labor Department’s monthly jobs report surveys a roster of companies and doesn’t have a way to accurately count the staffers of newly minted firms, Zandi notes.
“I suspect there’s a lot more job creation than (the Labor Department) is picking up,” he says.
While a business application simply indicates plans to start a company, many people are following through. The number of business establishments, or locations, increased 3% in the fourth quarter, the fastest pace since 1998, according to Moody’s and Labor Department data.
Many people who held onto their jobs during the crisis are funneling some of the government stimulus and savings they built during lockdowns into startups, Schwartz says. The government has sent most individuals three rounds of stimulus checks totaling $3,200 since spring 2020.
Meanwhile, home values shot up nearly 20% in the 12 months ending in April, according to the National Association of Realtors. Entrepreneurs can use the equity as collateral for a loan or to refinance their mortgages at a lower rate while withdrawing cash that’s added to the mortgage balance. Americans took out nearly $50 billion through such cash-out refinancing in the first quarter of 2021, up from $48.9 billion in the fourth quarter of 2020 and $21.4 billion in the first quarter of 2019, according to Moody’s and Freddie Mac.
By contrast, home prices were depressed for years after the housing crash that set off the Great Recession of 2007-09, curtailing startup activity, Schwartz says.
And with the pandemic making remote work a widely accepted option for the long term, entrepreneurs can start e-commerce, marketing, or other firms from the safety of their homes at minimal cost, he says.
Some business owners got started because there were trying to stay afloat after being laid off during the pandemic. Fifty-one percent of small business owners who launched companies during the crisis said they did so because of an economic need and about one-third cited a job loss, according to an April survey by Gusto, a payroll provider for small businesses.
Taylor, the Philadelphia restaurant owner, had more than 15 years of managerial experience in the food service industry. “But I was always too afraid” to start a business, she says. “A lot of restaurants within the first year go belly up.”
Losing her catering director job nudged her into action. Although she received jobless benefits, her husband, John, a contract driver, had to wait months for his first unemployment payment. The couple drew from their stimulus checks, unemployment benefits and savings to help pay the bills and open the restaurant. To get by, they cut out cable TV and ate smaller meals.
But they struggled for months to find a location. “People just didn’t return phone calls,” she says.
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They finally settled on a former café in Jenkintown and the landlord gave her space rent-free for the first few months. But there were other roadblocks: A contractor sharply raised his price for a new oven exhaust system, forcing Taylor to find a new supplier. And both Taylor and her husband were flattened by severe COVID-19 cases in October.
In December, the couple, along with millions of other Americans, saw their unemployment benefits temporarily suspended as Congress debated whether to renew them.
“We had nothing,” Taylor says. The mounting crises delayed the restaurant’s renovation for months. To pay for upgrades that ultimately cost about $20,000, the Taylors emptied their savings accounts.
On May 15, they opened the 20-seat Welcome Home Café, which serves breakfast and lunch. Taylor prepares the cold food and her brother cooks hot meals while her husband generally helps out. But, like restaurants across the country, Taylor can’t find a server and has asked other relatives, including her 21-year-old grandson, to fill in.
Sometimes, the café is nearly full. Then there are two-hour stretches when no one comes in.
Overall, “I feel very optimistic,” she says. “I remind myself we just opened.”
Anna Rogers and Catherine Wright also started their autism therapy business out of necessity, though it centered not on their own financial predicament but rather on their clients’ needs. Both women lost their jobs as behavioral therapists who treated autistic children when their Bremerton, Washington-based employer permanently closed in March 2020 on the assumption that parents would not want therapists visiting their homes.
“We were totally shocked because we knew clients would want more services, not less” during the pandemic Rogers, 35, says. “We thought, ‘How do we get these clients services?”
Within days, Rogers and Wright decided to start their own company even though they had no experience as entrepreneurs. They asked the parents of their 30 clients if they wanted to transfer the kids to their care – nearly all did – and rehired 17 of their former employer’s 25 or so therapists.
One big challenge: Therapists are paid within 30 days of service but insurance reimburses the company in 60 to 90 days. So the partners needed cash to make payroll. Fortunately, Rogers’ single-family house had climbed 50% in value the prior few years and she was able to use it as collateral for a $150,000 Small Business Administration loan.