To Help Small Firms Raise Productivity and Wages, ITIF Proposes SBA Program That Creates Economies of Scale and Scope

April 5, 2021

WASHINGTON—Small, local firms in many sectors of the U.S. economy cannot afford to raise their employees’ wages because they can’t afford to invest in new technologies and business models to raise productivity and profits. To break that cycle, a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, proposes creating a federal program to help small firms reap some of the benefits of scale and scope by collaborating in areas such as production technology, training, marketing, and health insurance. 

“The reason small firms pay low wages is that they are stuck in with low productivity,” said ITIF President Robert D. Atkinson, who co-authored the report. “Low-paying jobs are concentrated in domestic service sectors dominated by small firms that face a lot of local competition. They have few options for staying competitive other than to pay low wages and provide few, if any, benefits. To raise wages and improve benefits, small firms would need to earn higher profits—but that would require boosting productivity with new technologies and business models, and they can’t afford to make those investments because their margins are too thin. So they’re trapped.”

To address that problem, Atkinson and Michael Lind, a professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, propose creating a new Small Business Board (SBB) program under the Small Business Administration (SBA). In return for federal matching grants, the 50 states and the District of Columbia would create industry-wide SBBs, beginning with pilot projects in the least-productive and lowest-paying non-traded local service sectors.

Depending on the sector, these SBB projects could involve joint technology sharing; collaboration on research and development; production-technology modernization; targeted investments to improve productivity of individual firms; marketing; minimal wage, benefit, and working-condition standards; vocational training; and health insurance and defined-contribution retirement plans.

Atkinson and Lind model their SBB proposal on existing federal programs with long records of success, including the Agricultural Marketing Act of 1937, the National Institute of Standards and Technology’s Manufacturing Extension Program, and SBA’s small business investment company (SBIC) program. 

“There are two ways for small firms to break out of the low-productivity, low-wage trap. One is to let them be acquired and replaced by larger, more efficient firms, but that is a political non-starter,” said Lind. “The other option is to let small firms stay small, but help them reap at least some economies of scale and scope. That is something the Small Business Administration can and should help facilitate. To raise productivity and wages in many of the least-healthy sectors of the U.S. economy, we should apply the approaches that have already proved to be successful elsewhere.”

Read the report.