This crisis loan scheme saved jobs and made money
As the US Congress prepares to replenish its small business paycheck protection program, questions persist: Do secured loans for small businesses work in the long term? Who wins? Employees? Companies? Taxpayers?
The answer seems to be yes for all three, with an impact that lasts for years after an event has passed, according to a recent study based on a survey of French companies with less than 250 employees during the last global financial crisis. decade.
Conducted over a seven-year period starting in 2008, research shows that workers in companies that received secured loans enjoyed a more stable career path. The companies themselves also got stronger and the French government ultimately saved more in unemployment benefits than the cost of the program, according to the study, Employment Effects of Mitigating Financial Frictions: Evidence from a Worker-Level Loan Guarantee Program.
The research was conducted by Boris Vallée, Torstein Hagen Associate Professor of Business Administration at Harvard Business School, and three colleagues: Thorsten Martin and Julien Sauvagnat from Bocconi University in Italy and Jean-Nöel Barrot from HEC Paris School of Management.
How to keep small businesses afloat – and even ensure they end up thriving – is a critical question as the global economy freezes amid the COVID-19 pandemic. Small businesses employ some 70 percent of the workforce for the 35 countries that make up the Organization for Economic Co-operation and Development, write Vallée and colleagues in the discussion paper.
“Companies that have received loan guarantees, and their employees, have enjoyed much greater stability than their counterparts.”
In the United States, where small businesses make up about 47% of private sector employees, according to the Small Business Administration (pdf), Congress is expected to replenish its paycheck protection program this week with an additional $ 320 billion to supplement the loan guaranteed by the federal government. and a credit program that started on April 3, but quickly ran out. The program’s loans and lines of credit can cover weeks of payroll, defer payments, and are forgivable if companies use cash infusion for essentials like rent and to retain most workers.
A disaster in France
A dozen years ago, as the Great Recession unfolded, small French businesses were also facing a dire outlook, or what economists call a shock. To measure the effect of the policy on businesses and employees, the researchers compared results across regions with varying generosity in the loan guarantee program.
Companies that received loan guarantees, and their employees, enjoyed much more stability than their counterparts, according to the research. The incomes of workers in recipient firms were significantly higher than those in non-recipient firms, and they tended to stay with their 2008 employer more often and longer, in part because these firms did not close their doors.
“Exposure to the program results in a significantly higher probability of being employed over the next seven years, which translates into significantly higher accumulated earnings and lower unemployment benefits,” according to the study.
In 2015, researchers found that workers in recipient companies still earned more than their counterparts. Employees were also “considerably less likely” to have changed employers, the researchers write.
“What surprised us was the persistence of the effect – that even seven years later there was still a significant difference, while the shock itself lasted for one, maybe two years.” , explains Vallée.
Even more surprising: the program had a “net negative” cost for the French government. The loan guarantee program probably avoided the loss of about 217,000 jobs over a seven-year period ending in 2015, at a gross cost to the government of about 3,200 euros, or about $ 3,500 per job.
However, France not only got its money back, but in 2015 it actually made theoretical gains by avoiding the payment of unemployment benefits and collecting tax and social contributions from workers who would otherwise have been unemployed.
“To be fair, unemployment insurance is more generous in France than it is in the United States,” says Vallée. “So the savings for the government would be lower in the United States. But the same forces would still be at play, and since American workers overall have fewer protective safety nets, including in health care, they might appreciate increased job stability even more. ”
The current bailout could end up costing the US taxpayer more, he added, as secured loans are forgivable under certain conditions.
The researchers used detailed data on small and medium-sized businesses as well as information on individual employees representing around 4% of the French workforce. Bpifrance, the equivalent of the Small Business Administration in the United States, and the French Statistical Office include information related to individuals such as age, sex and employer via income tax returns, and “exhaustive data”. At the corporate level, all cleaned to ensure confidentiality.
The average company in the analysis had 20 employees in 2008 with assets of 3.3 million euros, or about 3.6 million dollars, and was about 18 years old.
Opt for the loan
Vallée has a simple tip for small businesses now: Apply for the loans.
“For the company, they should apply and try to get these loans because our evidence shows that the company is more likely to survive and more likely to be able to keep its workers,” Vallée said, qualifying the implications for companies of “perfectly unambiguous.”
For employees who work for these companies, this means that they are more likely to stay employed and in occupations where they wish to develop a career.
For the government, Vallée recommends “Go big, because the effectiveness of this tool is proven, while remaining attentive to design the most appropriate design to control costs”.
About the Author
Rachel Layne is a writer based in the Boston area.
[Image: BalkansCat ]
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