Did the Pandemic Deepen Racial and Ethnic Inequities among Small Business Owners? Data Limitations Make It Hard to Say.
The COVID-19 pandemic led to a major unemployment crisis, deep recession, and sweeping federal relief. Despite it all, we find the pandemic’s effects have largely not translated into dramatically higher delinquencies or defaults among small businesses—at least not yet. But how do these trends look for owners of color? In short, we find the story is muddled and we need better data.
Long before the pandemic, the US had highly inequitable disparities in business ownership by race and ethnicity. Because of decades of racist practices and policies, such as discrimination and redlining (PDF) designed to segregate and limit wealth building and access to capital, Black and Latino people were significantly underrepresented at the start of the pandemic in business ownership relative to their shares of the population. Meanwhile, Asian and white people were overrepresented in business ownership relative to their shares of the population.
Evidence is mixed on whether the pandemic widened racial disparities among business owners. One H&R Block survey of a client sample found Black business owners reported decreases in revenues more frequently than white-owned businesses. A widely cited NBER paper (PDF) found Black people experienced the greatest drop in self-employment in April 2020, followed by Latino, then Asian, then white people. A more recent analysis of the same data source also found that the decline in self-employed (PDF) Black people was the largest but was followed by white and Asian people, then Latino people. A survey by SCORE, a small business technical assistance provider, of a client sample shows that firms owned by white people experienced the largest percentage-point decrease in firms that were profitable and growing or steady (PDF), followed by firms owned by Latino and then Black people. (When looking instead by percentage change, the results were comparable for different racial and ethnic groups of business owners.) Yet another national survey of 500 small businesses (PDF) by Small Business Majority found disparities in permanent closures by race do not appear (in other words, are not outside of the margin of error).
Further evidence about race, COVID-19, and business ownership
We explored two additional data sources to better understand the effects of the pandemic on business owners by race and ethnicity: Dun & Bradstreet data and a Federal Reserve Board (PDF) survey of small business owners.
Like other studies, we found mixed results:
- The Dun & Bradstreet data show that changes in the share of businesses with past-due payments or debts owed were not different by race or ethnicity. Each racial and ethnic group increased by 1 percentage point. Note, however, that there were different levels of past-due payments by race before and after the pandemic.
- The Federal Reserve Board data show decreased revenues for all racial and ethnic groups of business owners. However, the authors do not find statistically significant differences in revenue changes by business owners’ race and ethnicity.
- The Federal Reserve Board data show a higher share of Asian-owned firms had reduced employees than did white-owned firms. There were not statistical differences between other racial and ethnic groups, however.
- Finally, the Federal Reserve Board data again show no statistical difference in the change in the share of firms experiencing financial challenges.
Like the literature cited above, these data sources have limitations. Our sample of Dun & Bradstreet data only includes firms with three or more trade lines—credit accounts, for example—so they miss smaller and newer firms and also likely underestimate the number of businesses owned by people of color. The Federal Reserve Board takes a nonrandom convenience sample from organizations serving small businesses, which may mean they do better with the firms we are missing, but the extent of any bias is unclear. The measures of statistical significance in the Federal Reserve Board study were provided at our request and not included in published material.
What can we make of these conclusions?
First, the effects of COVID-19 on small businesses by race and ethnicity are not clear. The studies above and our analysis have inconsistent findings.
Second, stark disparities in business ownership by race and ethnicity predate the COVID-19 pandemic. They are still evident and sizable today, 15 months into the pandemic.
Third, data on small businesses in the US are inadequate. Our collective understanding relies on unrepresentative or consumer-oriented surveys or client-specific data. And several studies include small samples of business owners of color, making it difficult to generalize findings about those groups. Beyond this limitation, the evidence to date has provided little by way of statistical significance reporting or assessment of response and nonresponse bias, meaning it is generally lacking in rigor. We need more timely, representative, rigorous, and racially disaggregated data collection on business trends and capital access from the US Census Bureau, Federal Reserve Board, Small Business Administration, and Consumer Financial Protection Bureau—including long-delayed data collection required under Section 1071 by the 2010 Dodd Frank Act. Equipping policymakers with better data can help them design, enact, and enforce policy solutions that support equitable outcomes. It can also help them evaluate whether existing policies and practices reduce or exacerbate racial and ethnic inequities.
Regardless of whether COVID-19 worsened the racial and ethnic disparities in small business ownership and health, federal policymakers have options and tools to address them. They could expand support for business service organizations to provide family-and-friends-style grants that pair with loan capital. They could also use sizable funding available through the American Rescue Plan Act to counteract historic underinvestment in entrepreneurs of color in ways that the Paycheck Protection Program did not. Better policy supports can help overcome inequities in small business ownership in the US, and better data insights can help us measure progress.
The Urban Institute has the evidence to show what it will take to create a society where everyone has a fair shot at achieving their vision of success.
Meeka Robinson Davis, owner of One-Of-A-Kind Hats, and daughter Chrstiana Davis stand for a portrait with some of the hats at their store in the Windsor Hills neighborhood of Los Angeles, California, on November 24, 2020. It's been a rough year for Black-owned small businesses, and the latest surge in coronavirus cases suggests a festive season without much celebration. "Black Friday" normally kicks off the holiday shopping season the morning after Thanksgiving. But rising coronavirus cases have prompted fresh restrictions in Los Angeles and elsewhere. The new rules mean Hotville Chicken, a south Los Angeles restaurant specialzing in "Nashville-style" spicy dishes, will have to shut its outdoor eating space after already closing the dining room. (Photo by PATRICK T. FALLON/AFP via Getty Images)