Surviving the Storm: Labor Market Resilience in Small Businesses During the Pandemic

Abstract

This dissertation highlights the importance of social distancing policies and targeted financial interventions, such as the Paycheck Protection Program (PPP), in influencing labor market outcomes and business survival during economic shocks. During the COVID-19 pandemic, policymakers implemented social distancing policies to limit the spread of the virus. These health policies significantly affect labor market outcomes, especially for small businesses. We start by exploring the direct (emergency implementation) and indirect (business closure policy) impacts of health policies on small business operations. Next, we examine how political partisanship affects health and labor market outcomes. Additionally, we show the effectiveness of the PPP that was implemented to help mitigate the adverse effects of the pandemic on small businesses by preventing job loss, supporting existing businesses, and encouraging new business formation. Using a unique dataset of hourly employee information for over one million U.S. small businesses and loan-level microdata for all PPP loans, our analysis shows the resilience of small businesses during the pandemic. The results indicate that small businesses faced severe impacts from employment contractions and closures at the beginning of the pandemic. Social distancing policies have reduced the number of employees, weekly hours worked, and weekly wages. Prolonged social distancing led to fewer workers engaging in voluntary stay-at-home behavior. Interestingly, our findings highlight that Republican-leaning counties show no difference in compliance based on the state governor’s political affiliation. The results suggest that the average level of political mismatch affects outcomes, and how blue or red a county is does not matter. PPP was implemented to boost employment and safeguard small businesses from exiting the market. Using a dynamic difference–in–difference (DDID) event study methodology, we estimate the impact of PPP on employment, wages, and the operational status of establishments and firms. The findings reveal that PPP have a significant and positive impact on employment, wages, and operational status. The results underscore the immediate and long-lasting benefits of PPP, including positive spillover effects on local business activities and new business formation. The results underscore the necessity for public policies to increase employment, protect small businesses, and promote resilience and economic growth.