Part 1 of Our Small Business Series
The following is the first in a two-part series by Julia Pollak exploring the role of small businesses in our economic recovery from COVID-19.
Read Part 2: Improving Business Dynamism
Business dynamism and startup-creation had been falling for two decades, even before the coronavirus crisis struck. Now, the pandemic has forced tens of thousands of small businesses to shutter and one-in-five say they may have to close their doors by year’s end if current economic conditions do not improve. If too many small businesses fail and too few new ones take root, that will prolong the recession, delay the recovery, change the economy and damage U.S. towns and cities—perhaps irreparably.
The Current State of Small Businesses
Three-fifths of small-business employees stopped logging hours at the start of the coronavirus pandemic as an estimated 1.85 million businesses temporarily suspended operations. Although there has been a substantial rebound in economic activity since April, data from Affinity Solutions suggests that small business revenue is falling even as consumer spending recovers, because spending is gravitating towards larger companies.
The Paycheck Protection Program (PPP) helped more than 5 million businesses to stay afloat and cover payroll costs. But the program has now expired and 84% of program beneficiaries say they have used up their loan. If there is another round of PPP funding, 44% of small businesses say they will apply for a second loan. In the meantime, more small businesses are shedding jobs than adding them, according to the Census Bureau’s most recent small business pulse survey. And it’s no surprise—22% say their sales are less than half of their pre-crisis level and half say their sales have fallen by 25% or more.
Why Small Business is so Important
Both in good times and bad, small businesses are the heart of the economy. They are responsible for a larger share of the new jobs created each year than their base share of employment, and have often boosted employment during recessions.
For example, entrepreneurship and self-employment served important roles in the gulf region’s labor market recovery after Hurricane Katrina. After that crisis, high local unemployment rates pushed people to start their own small businesses. Similarly, many workers who lost their jobs during the Great Recession responded by starting their own businesses.
Another benefit of small businesses is that they often drive innovation and competitiveness. According to one study, small firms are roughly thirteen times more innovative per employee than large firms, partly because they can make decisions quickly and reward top performers. More than half of the firms that experienced high growth in the wake of the Great Recession from 2009 to 2012 had less than 10 employees in 2009.
Small businesses are responsible for a larger share of new jobs creation, and have often boosted employment during recessions.
Small businesses also play a crucial role in expanding opportunity for workers who have traditionally faced barriers to employment. Compared with larger companies, which tend to be more bureaucratic and risk-averse, small businesses are often more open to providing job opportunities to people who face barriers to employment, such as people with criminal records. Small businesses are substantially less likely to conduct background checks, for example. They are also very often the driving force behind the development of towns and cities, employing local workers and contributing to local governments through taxes.
What Has Happened to U.S. Business Formation
Despite all the important roles small businesses serve, the U.S. appears to have become less hospitable towards them in recent years. Business dynamism and the rate at which startups are forming has been declining since around 2000. It has fallen in all fifty states, in almost every metropolitan area, and across industries.
Reversing the decline in business dynamism may not have been a policy priority during a ten-year economic expansion in which the economy added jobs despite declining new business starts. (The economy was able to add jobs thanks to job growth at existing businesses and a decline in layoffs.)
If too many small businesses fail, it will prolong the recession, change the economy and damage towns and cities—perhaps irreparably.
But when so many existing businesses are dying, it becomes more important than ever to encourage the birth of new ones. For many workers, starting a business could be an attractive alternative to competing in an anemic labor market, if only we cleared some of the obstacles.
Read Part 2 of our Small Business Series by Julia Pollak: Improving Business Dynamism