I love reading these articles. It claims that startups are booming.
Would that it be true.
I’m not saying that it’s not- just that the way folks determine that startups are booming is ludicrously incorrect. Which means, we really don’t know.
You see, the Census Bureau reports these new business formations by how many applications for Federal Identification Numbers are filed.
Yes, that is an indication that someone may want to start a business. But consider the real-life scenario.
Tommy and Cecilia just can’t make ends meet. So, in the evenings Tommy picks up some driving gigs at Uber; Cecilia starts delivering meals for DoorDash. Hmm- those are not new businesses. They are often cries for help during conditions of economic malaise.
Yes, Tommy and Cecilia are now in business for themselves. Only because DoorDash and Uber (and a slew of other such gig enterprises) don’t want to be responsible for employment taxes, for providing benefits like vacations and health care, etc. But, neither Tommy nor Cecilia will be hiring folks, growing a business in the traditional sense. (As a matter of fact, Tommy may find that his compensation at Uber doesn’t really cover the costs for his car [gas, upkeep, insurance]- so he loses money.) Or, he may clear $ 10,000 at the end of the year- and now owes Uncle Sam (actually, the IRS) some $ 1500 in employment taxes. (He probably won’t owe a penny in income tax, if he’s like many of my clients who think the Uber gig makes them money- and will have a very hard time coming up with the employment taxes he owes when he sends in his 1040 in April of next year.) Or, instead of Uber and DoorDash, they may be selling crafts online (like for Etsy), as they seek out more formal entertainment.
Want proof of my premise? The Census Bureau splits the data into “high propensity business applications” from “business applications”. The latter concept, business applications, is the total number of SS-4 (applications for Federal Identification Numbers filed). The high propensity business applications are those for corporate entities, ones that will be paying wages (hiring employees) or changing a business type, or are operating in the health-care, accommodation/food service, manufacturing, or select retail trades. And, if you look at the chart below, you will these (true) businesses only account for a slim portion of the new business formations. Yes, they are increasing- by about 20% during the pandemic; very different from the 200 to 250% reported for increase in all the applications. (The same trend held true for the last recession back in 2008-2009.)
Back in 1980, 12% of all employers were new businesses; the most recent data only has 8% of employers to be new businesses. (This ‘recent’ data is two years old, but the most current available.)
And, the Kauffman Foundation (a very reputable organization that studies new business and entrepreneurship) determined that 30% of the newly declared entrepreneurs in 2020 had lost their jobs; the prepandemic rate was half that. As a matter of fact, The Kauffman report demonstrates that entrepreneurship is really not growing very rapidly in the USA.
But, I would love to be proven wrong.
The pandemic has definitely been the time of entrepreneurship but most of these tiny at-home businesses are still struggling. I am grateful, however, that the writing business has picked up tremendously in 2021!
That sounds simply grand. I really DO want a bunch of new businesses to start- AND THRIVE! But, counting gig income as a new business defeats the purpose.
I’d love for you to be proven wrong, too, but this post was an eyeopener. You’ve proven once again how statistics can be manipulated, especially when a statistic is promulgated using data that is only relevant on the surface.
Alana recently posted..Summer Ends #SkywatchFriday
Yeah, Alana. I was pretty devastated once I realized that the headlines had no bearing on the facts.