As of mid-April, the U.S. economy had been largely shut down to stem the spread of COVID-19. In just four weeks, a record 22 million American workers have filed claims for unemployment benefits. Small businesses have been hit even harder by the social distancing measures and mandatory business shutdowns adopted in response to COVID-19. As governments are increasing assistance to affected small businesses and planning to reopen, more research is necessary to understand which small businesses and workers are most vulnerable to help deploy assistance programs more efficiently and more equitably.
This brief focuses on two major channels through which COVID-19 has impacted small businesses in the short term. First, social distancing measures have hit small businesses in certain industries harder than others by radically reducing demand for their services. As almost all Americans are required to stay at home, industries that require direct physical proximity with customers or coworkers are faced with plummeting productivity, sales, and revenue. Second, almost all state governments have explicitly required nonessential businesses to close their physical locations to suppress the spread of COVID-19. Thus, small businesses identified as nonessential lose almost all their revenue, given many of them find it difficult or simply cannot operate remotely. These two intertwined channels have a concentrated effect on certain sectors more so than others. If businesses in these industries are forced to close permanently, this will inevitably slow the economic recovery and lead to a jobs crisis.
By compiling a list of industries directly impacted by COVID-19, we estimate that:
- at least 32 percent of all small businesses (firms with fewer than 500 employees), or 1.9 million firms, face serious financial challenges during the shutdown.
- at least 20 million employees in small businesses directly affected by the pandemic are at risk of being dislocated — either being furloughed, becoming unemployed, or being forced to seek employment in more secure sectors.
- the mandatory nonessential business shutdowns that vary significantly across states could impact over half of all small businesses.
- small business workers who are already vulnerable in the job market are likely to be hit harder, such as younger, less educated, and nonwhite workers.
What Small Businesses Are Most Likely to Be Struggling with Business Closures?
Small Businesses in the Hardest-Hit Industries
We identified six hardest-hit industries — sectors considered the most vulnerable to the policy responses to COVID-19 — by compiling data from two sources. The first data source is a list of industries, identified by our colleagues Keith Wardrip and Anna Tranfaglia, in which a significant share of workers (over 40 percent) are in occupations that require close physical proximity to their customers or coworkers.1 The second data set comes from a research note by Moody’s Analytics,2 which identified a set of industries that are “most at risk” because of responses to the COVID-19 pandemic. As Table 1 shows, industries identified by these two approaches have significant overlap but also some apparent differences. Most industries from these two sources, except construction and mining,3 are considered among the hardest-hit industries in this study.
Table 1. Hardest-Hit Industries by COVID-19
|Retail trade (except grocery and pharmacy)a||44 and 45 (excluding 4451, 4452, 4461)|
|Arts, entertainment, and recreationa,b||71|
|Accommodation and food servicesa,b||72|
|Note: a indicated industries with larger shares of workers with high level of physical proximity by Wardrip and Tranfaglia (2020); b indicates industries categorized as most at risk in a research note by Moody’s Analytics (2020).|
By linking these hardest-hit industries to the most recent small business data from 2017,4 we identified about 23 percent of small businesses (1.4 million firms) and 28 percent of small business employees (about 17 million) that are likely most affected by the pandemic. In the Third Federal Reserve District states (Pennsylvania, New Jersey, and Delaware), there are about 120,000 small businesses and over 1.1 million small business employees in these hardest-hit industries.
The Aggregate Effect
In addition to the industries hit hardest by the pandemic, small businesses in other sectors could suffer from the effects of COVID-19 as a consequence of government-mandated business shutdowns. As of mid-April, almost all state governments had mandated the closure of physical locations of nonessential businesses to suppress the spread of the virus.5 Businesses that fail to comply risk citations, fines, or license suspensions. While the definition varies from state to state, recreational businesses like museums, movie theaters, gyms, casinos, and motion picture and video production, as well as certain retailers like furniture stores, florists, and shopping malls tend to fall in the nonessential category. But in some states, nonessential businesses cover many more industries, such as construction, certain kinds of manufacturing, and many service sector businesses. As an illustration, we estimate the aggregate impact of COVID-19 on small businesses based on the following assumptions:
- All states have mandated the same level of shutdown of nonessential businesses.6
- The baseline scenario assumes a moderate level of business shutdown, proxied by the definition in Delaware (the moderate shutdown scenario).7
- The scenario with a broad level of business shutdown is proxied by the definition of non-life-sustaining businesses in Pennsylvania (the broader shutdown scenario).8
- Only small businesses in hardest-hit industries or nonessential industries (except those with telecommute capabilities to allow employees to work from home)9 are affected.
- The exercise assumes no relief programs to assist small businesses.
Nationally, we estimate that about one-third (32 percent) of small businesses, or 1.9 million firms in total, have an immediate risk of being closed in the moderate shutdown scenario (Figure 1). Under the baseline scenario, over 20 million employees (or 33 percent of all small business employees) are likely to be impacted and have a high risk of becoming jobless unless they receive timely assistance. The results suggest that the moderate shutdown does not add much to the economic harm to small businesses outside the industries already hit hardest by the COVID-19 pandemic — only an additional 9 percent of small businesses and an additional 5 percent of small business workers are likely affected by the shutdowns.
Figure 1. Share of At-Risk Small Businesses and Workers (U.S.)
In practice, business shutdowns are often much broader because states may have ordered more businesses than those required in the moderate shutdown scenario to close. Moreover, small businesses outside the shutdown lists often choose to close voluntarily in response to COVID-19. Had all states mandated a broader business shutdown, over half of all small businesses and small businesses employees (51 percent or 3.1 million small businesses, and 51 percent or 31 million small business employees) would have been significantly impacted. The actual magnitude of affected small businesses is probably somewhere between the moderate shutdown estimate (the lower bound) and the broader shutdown estimate (the upper bound), because some states pursued the moderate approach, while others, like Pennsylvania and those in areas that were hit hard by COVID-19, have adopted the broader approach.
Figure 2. Share of At-Risk Small Businesses and Workers (Third District States)
In the Third District states, a total of 190,000 small businesses (44 percent) and over 1.8 million small business employees (42 percent) are likely to be affected (Figure 2). In Delaware and New Jersey, about one-third of all small businesses are impacted in the baseline scenario, while in Pennsylvania, approximately half of small businesses and small business workers (52 percent of small businesses and 49 percent of workers) are affected, primarily because the state adopted a broader business shutdown.
Of course, the goal of this exercise is to give practitioners and policymakers a sense of the magnitude of the short-term impact on small businesses, instead of attempting to provide a precise number of small business that will eventually close. The scale of the problem is unprecedented, even when we adjust some of our assumptions, and we believe we are providing a relatively conservative estimation.10
Which Small Businesses and Small Business Employees Are Disproportionately Affected?
Figure 3 illustrates the composition of the industries that are likely to be affected by falling consumer demand or the mandated closure of nonessential businesses. In the moderate shutdown scenario, small businesses in retail and accommodation and food services account for over half of all affected businesses (27 percent and 28 percent, respectively), followed by real estate and rental and leasing (11 percent); other services (10 percent); transportation and warehousing (9 percent); arts, entertainment, and recreation (7 percent); and others. In this scenario, with a few exceptions, the hardest-hit industries still account for the vast majority of the affected small businesses.