When The Pandemic Is Over, Don’t Despair the Loss of Laggard Small Businesses

March 12, 2021

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Some sectors of the U.S. economy have been hit far worse than others as the coronavirus pandemic has upturned personal consumption habits and government has ordered a halt to normal economic activity. But the greatest suffering has been in sectors with low productivity and low wages, such as hospitality, leisure, personal services, and bricks-and-mortar retail. The left has tried to fit this fact into pre-existing narratives by pointing out that workers in these sectors are disproportionately nonwhite and female. The anti-government right, for its part, has explained the disparity as the result of an attack by tyrannical federal, state and local governments on independent small business owners. 

But these conventional partisan framings should not blind us to an obvious fact: The sectors that have suffered the most are laggard sectors—laggard, that is, in moving from old-fashioned, labor-intensive and low-wage business models to innovative, capital-intensive, technology- and skilled-based ways of delivering goods and services. Upgrading these backward industries into high-wage, technology-intensive sectors must be a priority for bipartisan public policy in the aftermath of the COVID-19 pandemic.

December data from the Bureau of Labor Statistics provide shocking confirmation of the huge disparity in economic impact. In the leisure and hospitality super sector, unemployment was 16.7 percent and in “other services” 7.4 percent, compared to 4.3 percent in manufacturing, 6.4 percent in information sectors, and 6.1 percent in business and professional services. Not only is pandemic-induced unemployment vastly higher in leisure and hospitality, but wages, benefits, union representation and the number of hours worked per week are also lower. 

Real hourly wages grew an unprecedented 5.5 percent in April, due to massive numbers of low-wage jobs workers losing their job, which boosted the remaining average. However, wages fell in real terms from July to December of last year, as the pandemic worsened and the effect of economic stimulus measures wore off. Apart from mass unemployment, all of those sectoral disparities preceded the COVID-19 pandemic and will reassert themselves in the future, unless the country does something about them.

The U.S. economy since 1990 has added 20 million low-quality private sector jobs, compared to only 12 million high-quality jobs, according to the Job Quality Index. The difference is reflected in hours worked, as well as wages. Americans trapped in low-quality jobs work on average only 30 hours a week, compared to 38 hours for those in high-quality jobs. The federal minimum wage of just $7.25 per hour, which has not increased since 2009 while inflation has grown 21 percent, contributes to the problem.

Long before the pandemic, it was clear that many firms in the laggard sectors of retail, leisure, hospitality and personal services were privatizing their profits while socializing their overhead costs—by paying such low wages that many of their workers could survive only with the help of food stamps, the earned income tax credit (EITC) and other aid charged to taxpayers. For example, 52 percent of fast food workers have at least one family member relying on a public assistance program. And as we point out in our book Big Is Beautiful: Debunking the Myth of Small Business, the largest share of these workers are employed by small businesses. Indeed, a 2007 study by the Urban Institute found that “Low-income workers are disproportionately likely to work in smaller firms.”

During the Great Depression, President Roosevelt declared: “It is my conviction that the South presents right now the Nation’s No. 1 economic problem.” During today’s Great Pandemic these laggard, low-wage sectors may be the nation’s number one economic problem. Just as the impoverished rural South was brought up to the standards of the industrialized North by government-sponsored electrification, minimum wage and farm programs, so the sectors that are dragging down U.S. average wages and productivity need to be transformed.

Rescuing good and bad firms alike during the initial stage of the pandemic makes sense. But in the years and decades ahead, American taxpayer support should be limited to businesses that pay and treat their employees well and seek to increase profits, wages and output at the same time by adopting innovative technologies, like self-service technology, and high-performance labor practices. Firms whose business models rely on low-wage labor (and no benefits), or shifting fixed costs to workers, or paying so little that their employees have to use welfare services, deserve to go extinct. This will make it easier for firms that want to do right by their workers to do so.

The low-road firms of the laggard sectors should be replaced either by bigger firms in the same sector, almost all of which pay higher wages and use more technology, or by small firms that have taken the high-road path to high wages and high productivity. When the pandemic is behind us, we should be encouraged, not appalled when laggard sectors replace small, undercapitalized low-road firms with fewer large firms and chains, including many with online business models that reap the benefits of increasing scale or networks effects. For most of us, small-producer romantics to the contrary, the American dream is to earn enough by working to support a family at a decent and rising standard of living—not to own your own tiny, undercapitalized business that cannot turn a profit without underpaying and mistreating its employees. If fewer, larger, and more modern firms in a previously laggard sector can afford higher pay and benefits, all the better. 

In addition to permitting consolidation in backward, fragmented industries, public policy can also help small business owners who are willing to take the high road. Politicians are fond of imposing requirements like skills training on welfare recipients. Why not require small businesses that receive federal aid, such as SBA loans, to take part in long-term programs to help them evolve from low-wage, low-tech companies into more productive high-wage, high-tech firms? Why not raise the minimum wage and index it to inflation so employers that can’t survive without impoverishing their workers make way for employers that can? Why not require all firms, regardless of their size, to provide health insurance and paid vacations?

“Long-term” is the key phrase. Any policies that nudge small firms in sectors like leisure and hospitality to adopt new technology and treat their employees better should be phased in gradually over a period of years. But however gradual the transition may be, imposing benchmarks on small-firm progress toward higher wages and productivity as a condition for federal loans and other public aid, coupled with requiring all firms to do basic things like pay a reasonable minimum wage and provide health insurance, would be a win-win proposal that benefits industries, workers, consumers and taxpayers alike.