Big Business Has All the Advantages in the Pandemic

(Bloomberg Opinion) -- Even if fiscal stimulus is successful in getting the U.S. economy back on stable ground after the Covid-19 crisis, the economy will inevitably be transformed. When it comes to the labor market, despite the best efforts of policy makers to help small businesses, we're likely to see employment shift to larger companies, accelerating a trend that's been in place for several years.

Although both small and large businesses increased their workforces coming out of the 2008-09 financial crisis, in recent years there's been a growing divergence between the two types of employers. Since the end of 2017, companies with up to 49 workers have seen employment grow by just 130,000. Meanwhile, companies employing at least 1,000 workers have added 2.6 million employees. A prime reason for this has been the tightening labor market for service workers, with bigger businesses having an easier time increasing pay and benefits to attract people in an intensifying fight for talent. Starbucks, with billions of dollars in profits, has an easier time offering high wages and paying for workers' college education than a local coffee shop with fewer economies of scale and where a stroke of bad luck could mean having to shut down.

The same size and profitability of large corporations that gave them an advantage in the tightening labor market will enable them to ride out this crisis in a way that smaller businesses might not. The first advantage is being able to withstand several weeks or months of lost or reduced sales, making do with lower profits, dipping into reserves or laying off workers. Smaller companies might not have that cushion to fall back on and -- having fewer employees to begin with -- layoffs might mean they can't stay open.

Access to capital in these crises is dramatically different as well. Publicly traded companies can still fund themselves with fresh debt or equity, even if the price is higher, or have good relationships with banks that let them draw down revolving credit lines to weather the storm. Smaller companies might not have those same banking relationships. Instead, many might have to rely on the owner's credit card, which can max out quickly.

There's also the reality that not all companies are losing business right now, with grocery stores and health-care providers in particular likely to increase hiring during the next few months. Kroger, for example, the U.S.'s largest supermarket chain, advertised during the weekend that it had immediate job openings it needed to fill to keep up with demand as consumers stock up for the pandemic. Amazon is also taking advantage of the surge and has announced plans to hire as many as 100,000 workers. Workers at struggling smaller businesses may jump at openings like these, exacerbating the challenge these companies are already confronting.

It's more difficult for small businesses to petition the government for help during a crisis, and more difficult for the government to quickly roll out programs that can provide relief to hundreds of thousands of small, diverse businesses, each with their own issues. A systemically important industry such as airlines, with only a handful of companies, is an easier fix in theory than countless family owned restaurants that may have been struggling even before consumers stopped eating out en masse.

Once the economy reaches the bottom of the slowdown, particularly if the recovery is swift, larger businesses will be able to make key investments to staff up and replenish inventories in anticipation of the revival of demand. Meanwhile, smaller companies may still be scrambling to work out concessions with landlords, key suppliers and customers.

There may also be a demographic dynamic too, with older workers and business owners deciding now's the time to finally call it quits. Small business owners are more likely to be old, white men than the general population. Perhaps they kept going because times were good and it didn't make sense for them to retire yet. This crisis may end up being the impetus they need to close shop, take Social Security and spend more time with their families and grandkids. This represents a potential supply shock that could hold back a future recovery.

But the economy might also experience a surge of entrepreneurialism as new founders take advantage of the holes left behind by smaller businesses that couldn't survive a shakeout. A mix of widespread retirements, small business failures and displaced workers should lead to some interesting opportunities. But for the foreseeable future, look for bigger businesses to gobble up workers from their weaker, smaller peers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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