The Great Resignation led to the Great Rejuvenation? Let’s Examine the Data
A Great Rejuvenation?
An unprecedented wave of grassroots entrepreneurship coincided with mass resignations. In 2020, 4.35 million people applied to start new businesses – by far, the best year on record.
It’s widely reported that the pandemic prompted workers to question their jobs. Is my job satisfying? Do the daily tasks yield tangible benefits to me or society? Is this my career? The answers were evidently troubling. Millions quit – and so began the Great Resignation.
In a previous post and podcast, iLevel examined the claims about the Great Resignation. A detailed data analysis demonstrated that most people quit their jobs when other jobs – better jobs – were available. The data showed this was true before the pandemic and during it as well. While colorful anecdotes about job dissatisfaction offer compelling copy, foundational supply and demand labor market forces determine resignations. Indeed, people quit taking advantage of a favorable job market.
The Great Rejuvenation?
Now, analysts are linking the Great Resignation to a Great Rejuvenation. An unprecedented wave of grassroots entrepreneurship coincided with mass resignations. In 2020, 4.35 million people applied to start new businesses – by far, the best year on record.
After initial uncertainty caused by covid lockdowns, Q2 2020 witnessed a substantial uptick in new business starts and Q3 saw starts reach an all-time high (monthly applications peaked in July at over 550K). And, in 2021, new business formations have continued to soar. In April and May, there were a half-million applications, the second and third highest monthly totals.
Thus, the pandemic encouraged mass resignations which in turn unleashed an enormous wave of entrepreneurship. People wanted something better, something with purpose, and something that offered meaningful connections to others. They took the chance and exercised their entrepreneurial talents.
This account fits well with our beliefs about capitalism, the entrepreneurial spirit, and the capacity of individuals and markets to adapt after crises.
But, before embracing the narrative, we ask; was it in fact job dissatisfaction that fueled widespread entrepreneurship? After all, like job quits, business starts do not arise in the absence of market opportunities. Financial prospects inspire entrepreneurs and motivate them to take risks in the hope of something better.
It’s still rejuvenation. Yet the seeds of transformation are found in markets, not in the dark psychology of the pandemic.
Let’s look at the data.
Resignations and Business Formation
I quit! Now, off to start a business. This makes some sense. And the data exhibited in the graph below show that job quits, and business formations generally move together. However, while the correlation is positive it’s not exceptional (r = 0.58).[i] This suggests there are other – more powerful – factors that explain business starts.
[i] Correlations range from -1 to +1. The closer the correlation to +1 or -1, the stronger the association between variables. If the correlation is closer to 0, there is little to no relationship between the two variables.
Retail Sales and Business Formation
Identified demand is the key factor for any business startup. For example, the shift from in-person transactions to on-line generated immense demand for remote service businesses including video conferencing apps and delivery services. Moreover, the explosion of ecommerce during the early pandemic months raised demand for countless ancillary businesses in transportation, warehousing, and high-tech.
Undoubtedly, entrepreneurs noticed the turbocharged digital commerce environment and sought to exploit it. The graph below in fact shows business formations and retails sales (which include ecommerce) are strongly correlated. The monthly data move together, much more so than business formations and job quits. The correlation is impressive (r = 0.84).
Modeling business formations
Using data from the Federal Reserve in St. Louis (FRED) and the Census Bureau, iLevel used a sophisticated statistical modeling method called ordinary least squares multiple regression. The regression model translates a change in job quit rates, and a change in retail sales, into a value of business starts. The analyses thus determine how much each variable impacts the decision to form a business while controlling for the impact of the other variable.
The model yielded two results. First, over the entire period (2004-2021), there is a modest and statistically significant effect of job quits on business starts. However, the estimated impact of job quits on business starts does not change during the pandemic. If the pandemic had influenced people’s sense of job efficacy – as reported, then the statistical connection between job quits and business starts should be sharper over the past 18 months. This was not the case.
Second, the model demonstrated the powerful influence of economic opportunities. The effect of retail sales on business formations is roughly six times greater than job quits. For example, if monthly job quit rates increased from 2.5 to 2.7 – a typical change, this translates to 5,500 new business starts. However, if eCommerce sales rose from 350 million to 400 million – a representative change, this would add a whopping 32,700 business formations.
Conclusions
Several conclusions are drawn from the analyses.
First, the data do not support the psychological explanations for the Great Rejuvenation. The statistical association between job quits (pandemic angst) and business formations is modest and did not strengthen over the last 18 months. By itself, and within the context of a multivariate model, job quits offer an incomplete and weak explanation for a historic period of business formation.
Second, retail sales (economic opportunities) explain the notable rise in entrepreneurship. Covid opened wide a spectrum of economic opportunities that attentive entrepreneurs spotted and acted upon. During the pandemic, the financial system remained healthy. Housing and asset prices elevated, capital sources were plentiful and comparatively inexpensive and the government distributed money from several massive stimulus packages. In this favorable context, a surge in consumer demand (retail sales) fueled entrepreneurship.
To be clear, we do believe the pandemic caused many workers to seriously contemplate their lives and livelihoods. But people do not quit their jobs because they are disappointed. And entrepreneurs do not start businesses because they feel inefficacious about their work. Rather, people act when their environments offer tangible opportunities.
Finally, the current growth in business formations draws attention to the economic future. Noted economics Professor John Haltiwanger argues new business starts to signal a major restructuring. It’s not a surge and then a decline. Rather, new business starts represent a doorway to a much better economy. The pandemic forced people and businesses to drop outdated methods and try new ways. New technology and remote work spark novel ideas and will create countless business opportunities.
On the other hand, we must await the transition of new business applications into sustainable, thriving companies. About 20% of new businesses fail in the first year and by year five 50%. Perhaps the pandemic surge will include a disproportionate number of new business failures?
Only time will tell whether this extraordinary expression of entrepreneurial promise turns into real-world businesses that benefit the entrepreneur as well as the larger economy. The surge surely injects much-needed energy into the business environment and hopefully, that places the economy on a path of full recovery and growth.