Were small businesses more likely to permanently close in the pandemic?

Abstract

Previous estimates indicate that COVID-19 led to a large drop in the number of operating businesses operating early in the pandemic, but surprisingly little is known on whether these shutdowns turned into permanent closures and whether small businesses were disproportionately hit. This paper provides the first analysis of permanent business closures using confidential administrative firm-level panel data covering the universe of businesses filing sales taxes from the California Department of Tax and Fee Administration. We find large increases in closure rates in the first two quarters of 2020, but a strong reversal of this trend in the third quarter of 2020. The increase in closures rates in the first two quarters of the pandemic was substantially larger for small businesses than large businesses, but the rebound in the third quarter was also larger. The disproportionate closing of small businesses led to a sharp concentration of market share among larger businesses as indicated by the Herfindahl–Hirschman Index with only a partial reversal after the initial increase. The findings highlight the fragility of small businesses during a large adverse shock and the consequences for the competitiveness of markets.

Measuring Small Business Dynamics and Employment with Private-Sector Real-Time Data

“…In the months thereafter, about two thirds of closed businesses reopened, resulting in a cumulative closing rate in the four sectors of 17% one year after the start of the pandemic. This is only about two percentage points higher than the cumulative closing rate over the same time period one year prior, which implies, perhaps surprisingly but consistent with concurrent analysis by Crane et al (2022) based on alternative measures of business closures as well as Decker and Haltiwanger (2022) and Fairlie et al (2022) based on more recently released administrative data, that the pandemic has not led to a substantially higher rate of permanent shutdowns. 3 Third, new businesses openings in the four sectors considered have added more than 1.5 million new jobs since the pandemic started, constituting an important driver of the recovery from mid-June 2020 onward.…”

“…A related set of studies focuses explicitly on employment changes of smaller businesses; e.g. , Dalton et al (2020), Fairlie (2020), Fairlie et al (2022), or the Small Business Pulse Survey by the U.S. Census Bureau.…”

The COVID-19 pandemic and the electoral performance of governing parties in electoral democracies

“…Potential losses to the economy have been simulated by Walmsley et al (2021), who projected a 20% annual decline in US gross domestic product (GDP). Although the world got a better grip on COVID and economies are bouncing back, the COVID-19 pandemic caused a significant revenue loss, with small businesses being hit the hardest (Fairlie et al, 2023). Thus, we expect that a stricter stringent policy intervention undermines the governing party’s electoral support.…”

Can we “Claim” the Workforce? A Labor-Focused Agenda for Economic Development in the Face of an Uncertain Future

“…COVID-19 has had disproportionate impacts on both workers and businesses. While the Big Five tech companies have experienced increased profits, particularly Amazon-which has benefited from the growth of online shopping (Ovide, 2021)-many small bricks and mortar businesses have suffered financial losses, and potential permanent closures, with women-owned and Black-owned businesses particularly hard hit (see Bloom et al, 2021;Fairlie, 2020;Fairlie et al, 2022).…”