Rebuilding a more inclusive small business sector

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The nation’s economic recovery accelerated once again in March, pushing closer to pre-pandemic job levels. Buoyed by gains in sectors like leisure and hospitality, education and construction, the jobs picture continues to improve from the COVID-induced depths of last spring.

A similar trend played out in Rochester, where our recovery is outpacing the New York statewide average for both total employment (by 3.5 percentage points) and private sector jobs (by 3.0 percentage points). The region’s leisure and hospitality sector, hit disproportionately hard during the pandemic’s onset, has regained more than four of every five jobs it lost in April 2020. And the construction sector is actually above its pre-pandemic levels.

Much work remains to fully return to economic conditions that existed before COVID — both nationally and here in Rochester. Job levels in the U.S. are still 8 million below where they were in early 2020. And although our region has added back tens of thousands of jobs in the past ten months, we remain more than 5% below March 2020 levels.

And we have begun to see an important shift in rebuilding strategies across the country. As regions and cities continue the work of rebounding from this generational economic disruption, they are increasingly seizing on it as an opportunity to not merely build back, but do so in more equitable and inclusive ways. Many of those efforts focus on the small business sector — specifically minority-owned firms.

There’s no denying that the pandemic was devastating for the small business sector. But that impact was hardly monolithic across groups. A new analysis by the Small Business Administration found that in just the first two months of the pandemic, the total number of people who were self-employed and working declined by more than 20% nationally. The rate of decline among Black business owners (38%) was double that of white business owners. Declines among Asians (37%) and Hispanics (26%) were also considerably higher. While the impact variance has narrowed since the worst of the downturn, differences across racial groups persist. According to a Federal Reserve Bank survey, three out of every 10 small businesses say they may not survive this year due to the pandemic’s impact. The corresponding figure for minority-owned businesses is even worse — eight in 10.

The reasons for that disparity are myriad. Data show that minority-owned businesses tend to be smaller and generate lower revenues than nonminority-owned small businesses, leaving them more vulnerable to economic fluctuations. Access to capital is often more limited as well, a factor which played out with Paycheck Protection Program loans — nationally, minority-owned businesses tended to received them at a lower rate, smaller dollar amount and last in the process. And while COVID impacted every segment of the economy, sectors hit disproportionately hard included those with higher rates of minority business ownership.

McKinsey estimates there are 1.1 million minority-owned small businesses with employees in the U.S., collectively employing more than 8.7 million workers and creating more than a trillion dollars in annual economic output. Those may seem like powerhouse numbers at first glance, but as Brookings points out, “Nationally people of color represent about 40% of the population, but only 20% of the nation’s business owners with employees. The U.S. could have millions more businesses if women and minorities became entrepreneurs at the same rate as white men.”

An innovative new data resource allows us to measure that disparity on a community and regional basis. The Small Business Equity Toolkit, a first-of-its-kind dashboard developed by Accelerator for America and Drexel University, in collaboration with Mastercard, tracks data on the density, sales and high-wage industry participation of businesses by racial group in the 100-largest U.S. metros and cities. In terms of business density, defined as the number of employer businesses per 1,000 residents of a select population group, Greater Rochester’s rate for minorities (6.1) is less than a third the rate for non-minorities (19.6). The gap is even wider for Hispanics (3.2), and wider still among Blacks (2.9). Minority-owned businesses in the region account for a disproportionately low number of total jobs (2.9%), average wages at those businesses average only 71% of wages at all firms, and their average annual sales are less than half the average of non-minority small businesses.

In the midst of historic policy responses to the pandemic, Brookings notes, the crisis of these “missing businesses” must inform economic development strategy. If people of color had a business ownership rate commensurate with population share, there would be another 1.1 million firms nationwide capable of producing another 8.7 million jobs and 1 trillion in economic output. In Greater Rochester alone, closing the gap would add more than 3,000 firms.

The past year has been incredibly painful for small businesses. Ensuring they receive the continued support of policymakers and consumers is key to their recovery. But alongside strategies to rebuild the small business sector writ large, we need intentionality around closing long-present disparities. Strategies that help broaden access to capital and expand the capacity of small business support organizations, among others, offer not only an opportunity to rebuild but to advance economic inclusion at the same time.

Joseph Stefko is president and CEO of ROC2025, an alliance of economic development organizations established in 2019 to accelerate growth in the Rochester, New York, region through coordinated capacity-building investments in business retention and expansion, talent strategy, business attraction, downtown growth and regional branding/marketing.