Supporting Small Business Recovery: Lessons from the Pandemic

An interesting new research paper, by Robert Fairlie (UCLA), Frank Fossen and Ke Lyu (Univ. of Nevada-Reno) examines how the COVID-19 pandemic had differing impacts on US-based non-employer businesses (sole proprietorships and free lancers) vs. small business with employees. They find that the pandemic’s initial impacts crushed many businesses, but that these impacts were initially felt more heavily by non-employer businesses. One snapshot tells the sad story:  only 45% of non-employer businesses started in 2019 were still in business in late 2020. Meanwhile, employer businesses were more resilient, and their numbers actually grew in 2020 and beyond.

These patterns began changing in 2021 and the rate of decline in non-employer startups began slowing considerably. What caused this divergence, where economic shocks crushed the self-employed but had limited impacts on other small businesses?   The researchers suggest that the much-maligned Paycheck Protection Program (PPP) may have played a role.  Employer businesses were always eligible for PPP payments, but the self-employed were only included in the program after 2021.  In this view, support from PPP subsidies helped stabilize these companies in the face of pandemic-related economic shocks.  The researchers also recommend that future programs responding to disasters and economic shocks acknowledge the importance of support and investment in both employer and non-employer businesses.