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THE IMPACT OF COVID-19 ON SMALL BUSINESS OWNERS:EVIDENCE OF EARLY-STAGE LOSSESFROM THE APRIL 2020 CURRENT POPULATION SURVEYRobert FairlieUniversity of California, Santa Cruz& NBERMay, 2020Working Paper No. 20-022

The Impact of Covid-19 on Small Business Owners: Evidence of EarlyStage Losses from the April 2020 Current Population SurveyRobert Fairlie1May 23, 2020AbstractSocial distancing restrictions and demand shifts from COVID-19 are expected to shutter manysmall businesses, but there is very little early evidence on impacts. This paper provides the firstanalysis of impacts of the pandemic on the number of active small businesses in the United Statesusing nationally representative data from the April 2020 CPS – the first month fully capturingearly effects from the pandemic. The number of active business owners in the United Statesplummeted by 3.3 million or 22 percent over the crucial two-month window from February toApril 2020. The drop in business owners was the largest on record, and losses were felt acrossnearly all industries and even for incorporated businesses. African-American businesses were hitespecially hard experiencing a 41 percent drop. Latinx business owners fell by 32 percent, andAsian business owners dropped by 26 percent. Simulations indicate that industry compositionspartly placed these groups at a higher risk of losses. Immigrant business owners experiencedsubstantial losses of 36 percent. Female-owned businesses were also disproportionately hit by 25percent. These findings of early-stage losses to small businesses have important policyimplications and may portend longer-term ramifications for job losses and economic inequality.Keywords: Small business, entrepreneurship, self-employment, COVID-19, coronavirus, shelterin place, social distancingJEL Codes: J15; J16; L261Department of Economics, University of California, Santa Cruz, Stanford University (Visiting Scholar), andNBER ([email protected]).

1. IntroductionThe widespread closing of stores and businesses in the United States and around the world due tothe coronovirus is unprecedented. Stores, factories and many other businesses have closed bypolicy mandate or downward demand shifts. Many of these closures may be permanent becauseof the inability to pay ongoing expenses and survive the shutdown. The impact on smallbusinesses around the world is likely to be severe.Although the effects of COVID-19 on the economy showed up quickly in the stockmarket, the real estate market and unemployment claims, the effects on small business are notwell known because of the lack of timely business-level data released by the government. Thispaper addresses this limitation by creating estimates of the number of business owners frommonthly Current Population Survey (CPS) microdata files. Using these timely data, I examinehow COVID-19 impacted small business owners in mid-April 2020 – the first month to capturethe wide-spread shelter-in-place restrictions in the United States. The CPS data are used by theBureau of Labor Statistics (BLS) to track unemployment rates, and have been used in previousresearch to study determinants of business ownership (e.g. recently, Levine and Rubenstein2017, Wang 2019, Fairlie and Fossen 2019). The data allow for an analysis of recent trends inthe number of business owners by business characteristics such as corporation status andindustry, and demographic characteristics such as gender, race, and immigrant status.This study provides the first estimates of the early-stage effects of COVID-19 on smallbusiness owners from April 2020 CPS microdata. I find that the number of working businessowners plummeted from 15.0 million in February 2020 to 11.7 million in April 2020 because ofCOVID-19 mandates and demand shifts. The loss of 3.3 million business owners (or 22 percent)was the largest drop on record. When conditioning on working roughly two days per week orfour days a week, the losses are even larger (28 percent and 31 percent, respectively). Althoughincorporated businesses are more growth-oriented and stable, they experienced a drop of 20percent from February to April 2020.Patterns across gender, race and immigrant status reveal interesting findings. AfricanAmericans experienced the largest losses, eliminating 41 percent of business owners. Latinx alsoexperienced major losses with 32 percent of business owners disappearing between February andApril 2020. Immigrant business owners suffered a large drop of 36 percent, and female businessowners suffered a disproportionate drop of 25 percent.1

Most major industries faced large drops in the number of business owners with the onlyexception being agriculture. Construction, restaurants, hotels and transportation all faced largedeclines in the number of business owners due to COVID-19. Simulations reveal that theconcentrations of female, black, Latinx and Asian businesses in industries hit hard by thepandemic contributed to why losses were higher for these groups than the national average loss.Overall, these first estimates of impacts of COVID-19 on small businesses from the April 2020CPS indicate that losses were spread across demographic groups and types of business – nogroup was immune to negative impacts of social distancing policy mandates and demand shifts.These results build on the findings from a few previous studies of the early effects of thecoronavirus on small businesses. Employer business applications as measured by the U.S.Census weekly Business Formation Statistics fell in the five weeks from mid-March to md-Aprilby over 27 percent relative to the previous year (Wilmoth 2020). Estimates from the U.S. CensusSmall Business Pulse Survey indicate that roughly 50 percent of businesses report having a largenegative effect from the COVID-19 pandemic and that only 15-20 percent of businesses haveenough cash on hand to cover 3 months of operations (U.S. Census Bureau 2020; Bohn, Mejiaand Lafortune 2020). Bartik et al. (2020) conducted a survey in late March of nearly 6,000 smallbusinesses that were members of the Alignable business network. They find that 43 percent ofbusinesses are temporarily closed, large reductions in employees, and the majority of businesseshave less than one month of cash on hand. The Stanford Latino Entrepreneurship Initiative(2020) surveyed 224 high-revenue Latinx-owned businesses and found that 86% of respondentsreported immediate negative effects such as delayed projects and closure from the pandemic.This paper is the first to use CPS data covering the early effects of COVID-19 mandates anddemand shifts on small businesses, and the first to explore differential effects for female,minority and immigrant business owners, which is potentially important for targetinggovernment aid to preserve small businesses and the jobs they create. 12. Data1Large literatures explore the causes and consequences of disparities in ownership and success of minority-, female, and immigrant-owned businesses. For broader discussions and reviews of these literature, see, for example, Davilaand Mora (2013); Fairlie and Robb (2008); Jennings and Brush (2013); Kerr and Kerr. (2020); Parker (2018).2

2.1 Current Population Survey (CPS)Although research on small businesses and entrepreneurship is growing rapidly, there are veryfew national datasets that provide information on ownership with additional information ondemographic characteristics of the owners. Using microdata from the Current PopulationSurveys (CPS), I measure self-employed business ownership at the individual owner level. Theunderlying datasets are the basic monthly files to the Current Population Survey (CPS). Thesesurveys, conducted monthly by the U.S. Bureau of the Census and the U.S. Bureau of LaborStatistics, are representative of the entire U.S. population and contain observations for more than130,000 people.Measures of the number and rate of business ownership are available from only a handfulof other large, nationally representative government datasets, such as the Survey of BusinessOwners (SBO), Census PUMS files, and the American Community Survey (ACS). Measures ofbusiness ownership based on these cross-sectional data, however, cannot capture recent patternsbecause there is often a 1 to 2 year delay in release. The CPS is ideal in that it release microdatawithin a month of the survey week.The measure of business ownership in the CPS captures all business owners includingthose who own incorporated or unincorporated businesses, and those who are employers or nonemployers. Although some business owners own large businesses the predominate form aresmall businesses. I interpret the data as predominately covering small business owners.To estimate business ownership in the CPS data, I identify all individuals who own abusiness as their main job in the survey month (based on the class of worker question andmonthly labor force recode). The business ownership rate is thus defined as the percentage of thelabor force that owns and is actively employed in a business. The main job is defined as the onewith the most hours worked during the survey week. Thus, individuals who start side businesseswill not be counted if they are working more hours on a wage and salary job. In addition toproviding information on business ownership, the CPS data include information on detaileddemographic information including gender, race, and immigrant status of the owner. The dataalso include information on the industry and incorporation status of the business.Survey Timing and Shelter-in-Place Restrictions3

The CPS survey reference period is generally the calendar week that contains the 12thday of the month. For April, the week was Sunday, April 12th through Saturday, April 18th. TheMarch survey reference week was March 8th through March 14th. Given that shelter-in-placerestrictions started after this reference week, the April 2020 is the first CPS survey fully coveringthe early-stage impacts of COVID-19. On March 16, 2020 San Francisco Bay Area imposedshelter-in-place restrictions followed by the State of California on March 19. New York Statefollowed the next day. By early April all state imposed social distancing restrictions. Theanalysis below mostly relies on comparisons between February 2020 (prior to social distancingpolicy mandates) and April 2020 (the first month after policy mandates). 23. Results3.1 Number of Business OwnersI first examine small business ownership patterns over time to determine the impacts ofCOVID-19. Long-term trends in the number of business owners are displayed in Figure 1 (andrecent months in Table 1). The number of business owners working any amount and working atleast 15 hours in the survey week are reported. The choice of 15 hours is made to approximatetwo days a week and accommodate lumpy hours reporting (i.e. often 10, 15, 20, etc ). Over thepast two decades, the number of business owners in the United States has shown relativelysmooth patterns over time with a slight upward trend. What is clear, however, is the dramaticdrop in the number of business owners in April 2020. The number of working business ownersdropped from 15.0 million in February 2020 to 11.7 million in April 2020 because of COVID19. March 2020 only shows a small drop in business owners because of the limited effect fromshelter-in-place restrictions.The loss of 3.3 million business owners (or 22 percent) from February to April 2020 wasthe largest drop on record. When conditioning on working roughly two days per week, the lossesare even larger. There were 13.6 million business owners working 15 hours in February 2020and only 9.8 million in April 2020. The drop of 3.8 million business owners or 28 percent was2In most analyses March 2020 is not included because of partial effects. On March 11, the World HealthOrganization (WHO) declared COVID-19 a pandemic which might have resulted in early demand shifts over healthconcerns predating shelter-in-place restriction policies.4

unprecedented. Conditioning on 30 or more hours worked results in losses of 3.4 million or 31percent (see Table 1).Separating the number of business owners into unincorporated and incorporated statusindicates large drops for both groups (see Table 1). Incorporated businesses are viewed as moregrowth- oriented, committed, pro-cyclical and entrepreneurial (e.g. Fairlie, Miranda and Zolas2020; Levine and Rubinstein 2016, 2018). The number of unincoporated business ownersdropped precipitously from 7.8 million to 5.1 million (34 percent). But, incorporated businessowners were not immune to the COVID-19 impacts. The number of incorporated businessowners in the United States dropped from 5.8 million to 4.7 million (20 percent).Demographic PatternsThe CPS data provide detailed information on gender, race and immigrant status. Figure 3 (Table2) displays the number of female and male business owners in February and April 2020. Femalebusinesses were especially hit hard by COVID-19. The number of female business ownersdropped from 5.4 million to 4.0 million in the crucial two-month window. The decline of onefourth of female business owners is unprecedented. Male business owners also suffered majorlosses with a reduction of 2 million representing 20 percent of previous levels.Turning to racial patterns, Figure 4 (Table 2) displays business ownership by major racialgroups. The findings are alarming. The number of African-American business ownersplummeted from 1.1 million in February 2020 to 640,000 in April. The loss of 440,000 blackbusiness owners representing 41 percent of the previous level is disconcerting.Latinx business owners also suffered major losses. The number of Latinx businessowners dropped from 2.1 million to 1.4 million (32 percent) from February to March. Asianbusiness owners suffered losses of 230,000 representing 26 percent of February levels. Thelosses for whites were also large at 1.8 million business owners, but smaller as a percentage ofstarting levels (17 p