In 2006, just a few years before the 2008 recession hit, the number of small businesses created annually reached a high of 715,000. However, during the crisis, the number of startup businesses fell significantly, and reached a low during 2010, with an average of around 560,000.
Interestingly enough, however, as COVID-19 has brought an economic downturn quite similar to that of the 2008 recession, in the third quarter of 2020 alone, there were more than 1.5 million new business applications, which almost doubled the amount of that same quarter in 2019.
Why is this?
In 1940, Joseph Schumpeter, a political economist, coined the term “creative destruction” as a way to describe how new innovative businesses work to replace older, less efficient ones. This increase in start-up business seems to reveal that COVID-19 is working as a catalyst for what Schumpeter would describe as “creative destruction,” as it has completely changed consumer behavior and exposed blind spots in current markets.
As the country has begun to rebound from its period of crisis, the new consumer has begun to emerge, and has different preferences; from the way they work, to the way they shop, to the way they entertain themselves. It has been over 2 years after all.
On the surface, this change may be difficult to accept for many existing business owners and employees alike as many older companies have been wiped out; however, “creative destruction” works to keep markets buoyant as well as to create new jobs. These are two underlying but beneficial but advantages of the COVID-19 pandemic.
The “creative destruction” that occurred from COVID-19 worked to expose dead spots in current markets and thus drive growth in these markets, allowing them to stay afloat during the tough times of the pandemic. For example, in the first few months of the pandemic, the fragility of the supply chain of medical device sales was exposed as there was a national shortage of cotton swabs. Before COVID-19, just two companies dominated the entire market for nasal swabs, and since there was no reason for them to continue innovating their design, they had no competition. However, when hospitals and doctors’ offices began using these swabs as a way to test COVID-19, it was concluded that the swabs were not necessarily working that well, they were costly, and most importantly, they were not widely available.
This “dead spot” in the market thus allowed an engineer to lead a team dedicated to designing a better working nasal swab which could be manufactured locally, inexpensively, and on a mass scale which in turn increased the convenience and the availability of COVID-19 testing. Now, this same engineer is now working on a startup company of his own which will manufacture and distribute new swabs to more testing centers; a new start up which will employ many individuals.
While by nature, start-up businesses must begin small, their inevitable growth serves as a source of job creation; in the past, start-up businesses have accounted for more than one-fifth of job creation. In fact, in 2017, businesses with fewer than 500 employees accounted for nearly half of private sector employment. With start-up businesses on the rise, it is expected that entrepreneurs will begin to provide more and more jobs in the upcoming years, thus hopefully expanding the job market in the future.
While COVID-19 most definitely wreaked havoc on the economy and the job market, its ability to work as a catalyst for “creative destruction” also has provided some advantages although they are long-term and underlying. In fact, according to Schumpeter, “societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.”