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

It will likely be a while before the total economic costs of the COVID-19 pandemic are aggregated. Meanwhile, new research shining a light on the destructive nature of lockdown policies continues to emerge.

One such example is a recent NBER research paper, which, investigated how the pandemic-driven recession affected employment in start-ups.

The Findings

The authors of the study specifically analyzed how “individuals’ online job searches and applications changed during the emergence of the COVID-19 crisis,” finding 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 not surprising, is nevertheless concerning.

Startups are essential to economic growth. They are a key part of the churn and turn that drives the economy. They are drivers of innovation, job creation, and income growth.

This movement of talent away from startups will likely threaten the viability of entrepreneurship, potentially resulting in a chilling effect on the entire economy.