Coronavirus exposes the need to structure regulation around small businesses

Small businesses are essential to the American economy.  Apart from making up the majority of all American businesses, they employ close to half of the labor force and are responsible for creating the majority of new jobs.

Compared to big businesses, however, most small businesses operate on razor-thin margins. For this reason, they are more fragile, and thereby susceptible to economic downturns. This can be evidenced by the fact that restaurants and other small businesses are already laying off workers and closing for business. Most of them cannot foresee themselves riding out the effects of the coronavirus if it persists for much longer.

Many small businesses are already not insulated to economic hits — only 50% last more than five years, according to the federal government’s Small Business Administration, and a steep reduction in business could prove devastating.

Certainly, the pandemic has proven harmful for almost all businesses. But due to their nature, small businesses do face a lower chance of weathering it, especially considering most of them are service jobs and are labor-intensive and have thereby been significantly impacted by pandemic restrictions.

But this brings an interesting point regarding public policy.

The coronavirus has acted like a shock to the economy. But that shock has been felt differently by a lot of businesses. Unlike big businesses, small businesses have felt a bigger shock.

Regulations act the same way. Rules and complex regulations act as shocks to businesses by rising operational costs. However, these shocks are felt more acutely by small businesses. Big businesses are, generally, able to work around complex rules and regulations.

This is something that state policymakers should keep in mind when formulating public policy. Any policy that increases costs — like minimum wage paid leave, and occupational licensing — is more likely to affect small businesses much more disproportionately compared to big businesses. Big businesses, for the most part, can absorb costs that come with regulation.

For this reason, it is important that policymakers seriously use benchmarks that include small businesses when studying the impact of any policy.