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October 26, 2020

The impact of Covid-19 restrictions on small businesses in the US

Opinion image

The widespread closing of stores and businesses in the US and around the world due to the coronavirus is unprecedented. Stores, factories, and many other businesses have closed by policy mandate, downward demand shifts, health concerns, or other factors. Many of these closures may be permanent because of owners’ inability to pay ongoing expenses and survive the shutdown. The impact on small businesses around the world is likely to be severe. 

Using timely data, I examined how Covid-19 impacted American small business owners in mid-April 2020—the first month to capture the widespread shelter-in-place restrictions in the US—and then examined the effects of inter-state differences in the impacts of their relaxation.

The number of working business owners plummeted from 15.0 million in February 2020 to 11.7 million in April 2020 because of Covid-19 mandates and health- and economic-driven demand shifts, the largest drop ever. Total hours worked by all business owners dropped by 29%. Although incorporated businesses are more growth-oriented and stable, even they experienced a drop of 20% from February to April 2020.

Patterns by gender, race, and immigrant status reveal alarming findings. African-Americans experienced the largest losses—41% of active business owners. Latinx also experienced major losses—32%. Immigrant business owners suffered a 36% drop, and female business owners suffered a drop of 25%.

Building on these findings, I extended the analysis into the second and third months following widespread shelter-in-place restrictions—May and June 2020. In May there was a partial rebound from April 2020 with an additional rebound in June. The number of active business owners bounced back by 7 percentage points, but still left a 15% drop in business activity from February to May 2020. An additional 5 percentage point rebound in June implied 8% less business activity in June 2020 compared to February.

The disproportionate impacts from Covid-19 by gender, race, and immigrant status lingered into May and June. African-Americans continued to experience the largest losses, with 26% of active business owners still not active in May and 19% not in June. Latinx also experienced major losses with 19% of business owners inactive in May and 10% inactive in June. Immigrant business owners saw a 25% inactivity rate in May and 18% in June compared to February.

Most major industries faced large drops in the number of active business owners in April with the only exception being agriculture. The concentrations of female, black, Latinx, and Asian businesses in industries hit hard by the pandemic help explain why losses were higher for these groups than the national average losses.

Overall, these first estimates of the impacts of Covid-19 on small businesses from the April 2020 Current Population Survey and follow-ups indicate that losses were spread across demographic groups and types of business—no group was immune to negative impacts of social distancing policy mandates and demand shifts. But, they also reveal a partial bounce back for all groups. Although there is no way to know now if these business closures will be permanent, each additional month of inactivity has an impact on revenues, profits, and employees of these businesses—and their likelihood of ever re-opening.

© Robert Fairlie

Robert Fairlie is professor of economics at the University of California, Santa Cruz, and a Research Fellow of IZA.

Find more IZA World of Labor coronavirus content on our curated topics pages: National responses to Covid-19 and Covid-19—Pandemics and the labor market.

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We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.