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Flight to Safety: How Economic Downturns Affect Talent Flows to Startups

Covid-19 has caused a lot of disruptions. It will probably be a while before all the economic cost of Covid-19 itself and the shutdowns can be quantified. In the meantime, more and more research is coming up shining a light on how destructive the lockdown has been

A new NBER research paper, for instance, “investigates how economic downturns affect the flow of human capital to startups”. Startups are essential for the growth of the economy. They are a major contribution to job creation. Therefore anything that presents a detrimental impact on start-ups is bad for the economy.

According to the authors of the study, who analyzes how “individuals’ online job searches and applications changed during the emergence of the COVID-19 crisis’, they find that

  …job seekers shifted their searches toward larger firms and away from early-stage ventures, even within the same individual over time. Simultaneously, job seekers broadened their other search parameters, considering lower salaries and a wider variety of job types, roles, markets, and locations. Relative to larger firms, early-stage ventures experienced a decline in the number of applications per job posting, a decline driven by higher quality and more experienced job seekers. This led to a deterioration in the quality of the human capital pool available to early-stage ventures during the downturn. These declines hold within a firm as well as within a job posting over time.

This movement of labor from startups to established firms, while obviously not surprising considering the economic havoc that the shutdown has wreaked on the economy, is nevertheless concerning. Startups are part of the reason any economy grows. And their ability to survive and grow is therefore important for the growth of the economy. This movement of talent away from startups is threatening the viability and strength of entrepreneurial activity, and may potentially spell trouble for the economy.