Small Business is Key to a Vigorous Recovery

Everyday there are stories about the unfairness small businesses encounter in pursuing access to COVID-19 economic rescue dollars. Under the guise of supporting small businesses, the government has given loans and grants to national restaurant chains, billion-dollar hedge fund managers, and even an NBA franchise. All the while, tens of thousands of needy small businesses are unsuccessful because the first come first serve queue for rescue dollars is skewed toward well-heeled corporations with established banking relations.

The damage caused by this behavior is becoming evident. The ADP National Employment Report released May 6, 2020, shows that US businesses reduced their workforce by 20.2 million employees between March 12, 2020, and April 12, 202. Of that number, 11.3 million employees, or 56%, was eliminated from small businesses. As a point of reference, small businesses employ 47% of the private sector workforce, which means they were hurt disproportionately by the shutdown. More importantly, the current figures give an abbreviated snapshot of how bad the situation is because the cutoff date was April 12, almost one month ago.

One might argue this picture is not so bad after all small businesses have only shed ten percentage points more of their workers than is there share of the total workforce. But the situation is direr than one could imagine. During the depths of the Great Recession, small business was the only bright spot in the economy and the engine that carried it through.

While large corporations cut jobs in record numbers during the last recession, small businesses continued to generate new jobs and on balance created a net addition to employment. At one point, they added 80% of all of the net jobs created. With that historical perspective in mind, one can see more clearly why the current situation threatens the economic recovery. Not only are small businesses not adding more new jobs, but they are also losing more employees than large corporations are.

The likelihood that large corporations (those with 500 or more workers) can create a robust recovery vigorous enough to absorb 30 million unemployed workers is next to fantasy. If there is to be a healthy recovery, it will inevitably come from small businesses and new startups.

A recent report by the Small Business Administration indicated that in 2016, small businesses created 1.8 million net jobs. Of that number, firms employing fewer than 20 workers experienced the most significant gains, adding 1.2 million net jobs. Similarly, in 2017, a total of 241,000 establishments started up (with one or more employees). They generated over 850,000 new jobs. In contrast, today giant corporations in retail, airlines, and many other industries are planning to reduce their workforce permanently.

If the new CARES act does not channel sufficient funds to small businesses and startups, brace for an anemic economic recovery at best, and more likely, prolonged stagnation.

About Thomas_Danny_Boston 27 Articles
Danny Boston is an economist, writer, and entrepreneur. He is professor emeritus of Economics and International Affairs at Georgia Tech and for 25 years served as CEO of EuQuant, an economic research company. Today, Danny publishes the blog GazelleIndex.