EU start-up calculator: Impact of COVID-19 on aggregate employment: Scenario analysis for Austria, Belgium, Germany, Hungary, Italy and Spain

Abstract

Early data show that the COVID-19 pandemic has affected particularly strongly start-up business activity. This may have dramatic and lasting effects on aggregate employment which persist as the cohort of new firms age. To assess such an impact, we developed the EU start-up calculator. This is an empirical tool that allows to conduct scenario analysis to compute the impact that the disruption of start-up activity has on aggregate employment on EU Member States and their economic sectors. In particular, we simulate the effects of a strong (i.e. of magnitude equivalent to the Great Recession of 2008 and 2009) but short-lived (i.e. lasting one-year) crisis in Austria, Belgium, Germany, Hungary, Italy and Spain. This shock generates important and persistent job losses in all the countries ranging between 0.7 (Belgium) and 2.2% (Austria) of the deviation from the employment trend in 2020 and results in a computed potential cumulative loss of jobs for the period 2020-2030 ranging from 82,000 (Belgium) to 1186,000 (Italy). The potential negative impact is particularly high in Austria, Hungary, Italy and Spain, as well as in the service sector, which are characterized by a high firm turnover and a reliance on start-ups and young firms for job creation. We also find that in most countries the deterioration of the survival rate of young firms plays an important role in driving employment, seconded by the number of new entrants. As a consequence, policies aimed at supporting young firms and incentivizing the creation of new ones may significantly mitigate the medium-term effect of the pandemic. In fact, when we simulate bounceback scenarios where the number of firms entering the economy rapidly increases in 2021, in every country the outlook is significantly improved, the recovery is faster and the aggregate job loss is lower.