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  6. Will American small business fire its workers?

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Will American small business fire its workers?

04/01/2020

Jack Manley

An economic report out of the St. Louis Federal Reserve (Fed) last week made waves in the investing community, suggesting that the impending recession could see 47 million layoffs, resulting in a 32% unemployment rate, worse than during the Great Depression. This is not a hard number to reach: as of February 2020, there are roughly 35 million employees in transportation, leisure and hospitality and retail trade, all industries in the crosshairs of “social distancing.” Other industries, like energy, will suffer as well.

The author of the report acknowledges that this projection is based on some “back-of-the-envelope” calculations: for example, it does not account for those who may drop out of the labor force. But ultimately, how high the unemployment rate gets is dependent on one key question: will American small business fire its workers?

There are roughly 65 million “small business” employees in the U.S.1; the CARES act, a 2.2 trillion USD stimulus package passed last week, is at least partially aimed at protecting them. Struggling businesses may take out loans up to the value of eight weeks’ worth of operating expenses (rent, utilities, interest and payrolls), which become forgivable to the degree that businesses do not lay off their workers, suggesting that many otherwise-imperiled employees may not lose their jobs.

However, despite these incentives to employers, unemployment among many small business employees may still skyrocket. Employees of industries most vulnerable to “social distancing” are some of the lowest paid in the workforce, with both low average hourly earnings and low weekly hours worked. Between normal state unemployment benefits and the supplemental 600 USD per week unemployment check from the Federal government – another component of the CARES act – many workers may find themselves with a higher income while unemployed than during their employment and, paradoxically, want to be laid off. Small businesses may be happy to oblige: ceasing operations would result in savings on utilities and payroll, and with payments to landlords likely negotiable during this period of stress, minimized expenses could be covered through bank loans without government intervention.

For now, though, it is still too early to tell. In the meantime, investors should keep an eye on future jobless claims to get a sense of the scale of mounting unemployment. But perhaps more importantly, it is worth remembering that any disruption, no matter how severe, will likely be short-lived, and when an effective vaccine arrives, the labor market will tighten quickly again.


1 Defined as an employee of a firm with fewer than 500 employees. Data are as of 1Q 2019.

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