Small Business Struggles Point To Three Policy Priorities

Young business survival and growth. Workforce development. Child care.

Those, at least, are my takeaways from new survey data on small businesses. Together with the Small Business Roundtable, Facebook recently released its latest State of Small Business report for the United States. And the National Federation of Independent Business published two new updates from its members.

A topline finding in these surveys is the continuing struggle for many small businesses to stay open, pay the bills, and deal with massive uncertainty. The Facebook report, which provides an update to survey data last collected in April, finds a large jump in pessimism. In December 2020 (when the new survey was fielded), just 37% of closed businesses expected that they would reopen within six months. In April, that figure was 66%. The longer the pandemic has dragged on, the gloomier small business owners have gotten.

In the NFIB’s Small Business Economic Trends report released in January, its Optimism Index fell in January. Here’s the most startling part: “Owners expecting better business conditions over the next six months declined 7 points to a net negative 23 percent, the lowest level since November 2013.”

Sinking expectations among small business owners are not necessarily surprising. The last few months have been the worst of the pandemic in terms of infections, hospitalizations, and deaths. Things have started to turn around in recent weeks, and one has to believe that, in surveys being taken now, perhaps we’ll start see glimmers of optimism.

More interestingly, the Facebook and Small Business Roundtable report—as well as some data points in the NFIB materials—illuminate three issues that will be critical for recovery.

Young Businesses are the Key

This sentence in the Facebook report stood out to me: “Personal businesses tended to have opened more recently and have fewer employees, characteristics that were found to be associated with higher closure rates” (emphasis added). And again later, in discussion of the disproportionate impact on minority-owned businesses: “Businesses in majority-minority neighborhoods were also more likely to have opened more recently and to have fewer employees.”

Younger firms (in business for no more than five years) have been more vulnerable during the pandemic to closure. This is partly because young firms, in good times and bad, are typically less likely to survive. But over the last 12 months, business age has been a vector of disproportionate impact on businesses owned by people of color and women.

In 2018, according to the Census Bureau’s Annual Business Survey, 36% of U.S. employer firms had been in business for five years or fewer. Among Black-owned businesses, 46% were 5 years or younger; for women-owned businesses, 42%. One implication of this age breakdown is that new business entry over the last several years has been higher among women and people of color. Yet roughly half of employer firms don’t survive past their fifth birthday—and the pandemic exacerbated the vulnerabilities of age.

The other implication is that the extent to which the benefits of the post-pandemic recovery are broadly shared will depend, in part, on strong rates of new business entry by women and people of color. And, the survival and growth, in their early years, of the businesses they start.

Small Businesses Need Talent

This finding, from the NFIB survey, is striking given the context of a pandemic recession and high unemployment: 90 percent of small business respondents hiring or trying to hire “reported few or no ‘qualified’ applicants for the positions they were trying to fill in January.” Finding quality labor is the number one business problem now cited by NFIB respondents.

A similar result is found in the Facebook/Small Business Roundtable report, where 34% of small businesses said they “found it challenging to find adequately skilled employees.” When the underemployment (U-6) rate is 11.1%, such stated challenges are remarkable.

This could be a function of the pandemic and its effects. Economic research suggests Covid-19 “is a persistent reallocation shock,” meaning that jobs (and workers) are getting shifted into different industries. Such reallocation would result in businesses in certain areas—especially those in low-productivity areas—facing labor challenges. We also know that many people have left the labor force, especially women.

Yet a “skills gap” existed pre-pandemic. In the NFIB survey data, the citation of qualified labor as a challenge has been rising steadily since 2010. Coming out of the pandemic, small businesses—of all sizes and ages—will need talented workers. Our workforce systems—education and training—are clearly in need of upgrading and modernization.

Child Care

The move to virtual learning and restrictions on child care centers has put enormous burdens on parents, particularly those without the option to work from home. Much of this burden has fallen on women, including female business owners. In the Facebook report, while 14% of male small business leaders said they had spent more time caring for children in the past six months, 35% of female small business leaders said they had. The gap was comparably large in educating children at home and housework.

Overall, in the Facebook survey, “female business leaders were 31 percentage points more likely to report that domestic tasks impacted their work a moderate amount, a lot or a great deal compared to male business leaders.” This unequally-shared burden has been on top of higher business closure rates in those sectors with higher proportions of female business ownership, as demonstrated in the Facebook report.

Women business owners—and new potential female entrepreneurs—face an impossible set of circumstances. Their business is more likely to still be closed; instead of working on a new opportunity or to reopen, they’re caring more for children, both those in school (at home) and those too young for school. Even if their business is still open, they’re facing high pressure because of those caregiving responsibilities.

A child care crisis existed in the United States before the pandemic; like the other issues highlighted here, it was greatly worsened over the past year. It affects many more people than just small business owners yet, like business age, has been a vector of disproportionate impact among entrepreneurs.

These dimensions of the crisis and their impact on U.S. entrepreneurship must be kept in mind by policymakers as they forge ahead with relief and reform.