What have you learned about the timing and effects of Paycheck Protection Program (PPP) loans on small businesses and employment early in the pandemic? What are the implications for future economic crises?

Because the PPP was such a huge program, I wanted to study whether it had the intended effects on employment. We looked at PPP data from the Small Business Administration, the government agency that provided the loans to help businesses keep their workers employed during the pandemic. The data provide information about which businesses received loans and for how much. We also looked at data on state employment levels during the same time.

One of the things that stood out in our analysis was that the timing of receiving a loan was more important than the loan amount in terms of mitigating employment loss at the state level. Early in the pandemic, during the lockdown, no one knew what to expect with the economy. Many consumers stopped spending altogether, and businesses were in dire need of help. States that managed to get a lot of funding early on—essentially, during April 2020—had more favorable labor market outcomes: Based on our estimates, these states were able to keep employment declines lower by a significant margin. This tells us that if a similar crisis were to arise, there could be value in providing this type of loan to small businesses as early as possible.

One potential drawback of the rapid creation and growth of the PPP was that it was not targeted. Some estimates suggest that more than 90 percent of all small businesses received at least one loan but only a small fraction (one quarter to one third) of PPP dollars went directly to workers who would otherwise have lost employment. Given this potential problem, we might want to think about the right infrastructure to implement a similar policy in the future. Finally, we do have to be careful about attributing this success to only the PPP because there were other policies in place at the time that may have also played a part.

A related question is, how should we administer this type of program? We don’t fully understand the answer to this question yet. Many of the states that received a large chunk of their PPP loans early in the pandemic happen to be relatively small states in terms of population, such as Maine, Nebraska, and South Dakota. But these states were not experiencing the huge COVID-19 surges early on that states such as New York or New Jersey were. We could hypothesize that in some of these larger states, people were busy trying to survive those surges and not able to focus on applying for PPP loans. Maybe in smaller states, money was able to get to small businesses more quickly. Again, these are just hypotheses.

When I look at data, I don’t get to see how the whole loan process played out for individual businesses. But through personal anecdotes, I’m able to gather some insight. For instance, someone from South Dakota reached out recently and told me he thinks that for a program like the PPP, there is value in working with local banks and credit unions. He believes that a lot of small community banks or credit unions were more efficient in helping process PPP loans for small businesses. This might be true, but I haven’t seen any empirical evidence on this. I do think it’s an interesting research question.

Overall, what our research suggests so far is that receiving funds early in the pandemic led to relatively better labor market outcomes. We plan to continue studying PPP loans to see if we can get insight into the medium- to long-term effects of the program on employment levels.

Murat Tasci is a senior research economist at the Cleveland Fed. His primary interests include macroeconomics and labor economics.

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