Chris ChoPublished: March 25th, 2026
New businesses are forming at the fastest pace in years, but they're hiring fewer workers than ever—a shift driven by artificial intelligence tools that let founders build companies on shoestring budgets and skeleton crews.
The number of high-propensity businesses—companies the Census Bureau flags as likely to hire employees—jumped 15.1 percent year over year in January, according to a Bank of America Institute report released this week. At the same time, business applications with explicit plans to hire workers fell 4.4 percent.
The divergence marks a fundamental change in how companies scale. Small businesses poured record amounts into tech services last month, with spending climbing more than 14 percent compared to February 2025—the strongest growth since Bank of America began tracking the data. Retailers led the charge with gains exceeding 25 percent, followed closely by manufacturers.
“This might be linked to a productivity push,” the Bank of America analysts wrote in their report.
The hiring freeze spreads
The trend couldn't come at a worse time for the labor market. Small businesses—typically defined as companies with fewer than 500 workers—employ roughly 45 percent of Americans. A sustained pullback in hiring from this sector would hit employment hard.
Federal Reserve Chairman Jerome Powell said this week that private sector hiring has effectively stopped. Employers cut 92,000 positions in February, pushing the unemployment rate to 4.4 percent.
“Effectively, there's zero net job creation in the private sector,” Powell said during a press conference following the Fed's decision to hold interest rates steady.
Bank of America's payments data backs up Powell's assessment. While total small business payments per client rose 1.9 percent year over year in February, the figure declined month over month. More telling: payroll payments per client turned negative on an annual basis, even as overall business formation accelerated.
Larger companies are making similar calculations. Fintech firm Block laid off roughly half its workforce last month, with CEO Jack Dorsey pointing to AI tools “enabling a new way of working which fundamentally changes what it means to build and run a company.”
Some critics dismissed the move as “AI washing”—using artificial intelligence as cover for correcting pandemic-era over-hiring. Block's chief financial officer and chief operations officer, Amrita Ahuja, told Fortune earlier this month that wasn't the case.
AI has been cited in roughly 8 percent of all job cut announcements in 2026, totaling about 12,304 positions, according to research firm Challenger, Gray & Christmas.
The new startup math
For venture capitalists watching early-stage companies, the numbers tell a stark story. Andy Tang, a partner at Silicon Valley firm Draper Associates, said the startups he spoke with last month are cutting their engineering teams by a third on average.
The reason: AI coding tools can produce three to five times more code than human engineers at a fraction of the cost. For cash-strapped founders, buying AI tokens beats expanding headcount.
“If you do the math, you don't need nearly as many engineers,” Tang said. He added that most knowledge work is now easy to replace with AI agents.
Tang envisions a future where solo entrepreneurs build entire companies using AI agents—what he calls “founderless unicorn companies” that scale without traditional employees.
The playbook is already working. Rudy Arora and Sarthak Dhawan launched TurboAI two years ago with less than $300 while still in college at Northwestern University and Duke University. The AI-powered study tool converts lecture notes into flashcards and quizzes.
Today, the childhood friends—both now 21—run a company with 8.5 million users generating roughly $1 million per month. Their team: just 13 employees.
“If we were a company two-and-a-half years ago, it would take over 100 employees,” Arora said. “The only reason we're able to do it with 13 employees right now is because of AI.”
Despite raising $750,000 in funding two years ago, the pair said they haven't spent it because they're already profitable.
Dhawan said startups are only beginning to discover AI's potential. “We're going to see people even younger than ourselves, building companies with even less resources,” he predicted.
What businesses are spending on
Bank of America's data reveals where the money is flowing. Retailers are using AI to enhance websites with better product recommendations and streamlined checkout processes. Manufacturers are modernizing supply chains to boost efficiency.
The analysts noted that small businesses aren't just cutting costs—they're investing in technology to stay competitive in tight labor markets. Productivity appears to be accelerating beyond pre-pandemic averages as new firms leverage these tools.
Consumer spending provides a mixed backdrop. Household card spending grew 3.2 percent year over year in February—the strongest pace in more than three years—with services driving momentum. That suggests the broader economy remains resilient even as employment stalls.
An alternative hiring indicator—payments to recruiting and staffing firms—stabilized in February after dipping in January. But the recovery remains tentative, with most small businesses still hesitant to expand payrolls.
Two views of the future
Not everyone sees AI as a job killer. Apollo Chief Economist Torsten Slok predicted the surge in new company formation will ultimately boost employment.
“As these firms scale, they will create jobs, underscoring that AI is likely to strengthen, not disrupt, the US labor market,” Slok wrote in a note earlier this month.
That optimism hinges on startups eventually hiring as they grow. But the current data suggests founders are finding ways to scale without adding workers—at least in the early stages.
For engineers and knowledge workers, the shift means fewer entry-level opportunities at startups. The post-2008 startup boom required experienced programmers and venture capital to get companies off the ground. TurboAI's founders proved that model is outdated.
The February employment figures show the immediate impact. With zero net private sector job creation and unemployment at 4.4 percent, the labor market is treading water while business formation accelerates.
Whether Slok's prediction of eventual job growth materializes depends on how these AI-powered startups evolve. For now, founders are choosing tokens over talent—and the workforce is feeling it.
