Recent studies examining the effectiveness of the nearly $800 billion Paycheck Protection Program offer a broad range of estimates for the number of jobs it saved – from as few as 1.5 million to as many as 18.6 million. This lack of consensus could be a problem for policymakers, Federal Reserve Bank of Boston economist Gustavo Joaquim writes in a new brief titled “Allocation and Employment Effect of the Paycheck Protection Program.” The brief explores why the empirical results vary so widely.

“From a policymaker’s perspective,” Joaquim writes, “it is paramount to understand how successful the program was in preserving jobs at small businesses and how the program could have been more effective.” However, he adds, “We still can’t accurately pinpoint the extent to which the program was simply a transfer from taxpayers to small-business owners and the extent to which it did help to maintain jobs at small businesses.”

Joaquim notes that the PPP went through a series of stages and that the program’s effectiveness may have varied from one stage to the next, influencing the estimates of how many jobs it preserved. More specifically, in the early stages, the program seemingly had a smaller effect on employment per dollar allocated. In the later stages, the program appears to have been more effective at saving jobs.

Congress created the PPP in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act to prevent pandemic-related job losses at small and medium-sized businesses. The program began issuing the nearly $800 billion in forgivable loans in April 2020. The provisions changed over the course of the program, but in broad terms, the portion of a PPP loan used to keep workers on the payroll determined the share that was forgiven. The Small Business Administration oversaw the program.

Banks were responsible for approving the loans and allocating the funds. The loans were fully guaranteed by the government and did not affect banks’ capital requirements. “Overall, the program was designed to allow a large number of institutions to process loan requests while minimizing the impact on their balance sheet structure,” Joaquim writes.

Early on, loans tended to go to businesses less likely to fail

Early in the PPP, demand for the loans exceeded supply. Joaquim writes that from the start of the program on April 3 through April 16, 72% of eligible businesses reported applying for a PPP loan, but only 36% reported receiving one. At this stage, loans tended go to businesses in areas that were less affected by the pandemic – for example, areas that were not under a government-mandated lockdown. Loans also tended to go to the largest of the eligible businesses early on, possibly because they were more likely to survive and because the banks were more invested in their survival due to existing or potential future lending relationships.

Later in the program, demand for the loans waned, and Congress approved an additional $321 billion in funding through the PPP Act. With an excess supply of funds now available, banks expanded the range of loan approvals beyond their most preferred customers.

In other words, when banks were more selective, they more frequently allocated loans to businesses that seemingly were less likely to fail. As a result, the PPP money may have had a smaller effect on employment during the early weeks of the program but a larger impact when banks were not as selective and the loans were going to businesses in greater jeopardy of failing.

“The allocation of these loans across regions and firms was not random,” Joaquim writes. “Regions less affected by the pandemic, as well as larger firms, received PPP loans earlier. We have illustrated that this different timing in allocation can affect our interpretation of the empirical evidence and that apparently conflicting empirical results can be reconciled – although none captures the overall effect of the program.”

The brief derives from research for a pair of working papers that Joaquim coauthored with Felipe Netto, an economics Ph.D candidate at Columbia University. In one of those papers, “Bank Incentives and the Effect of the Paycheck Protection Program,” Joaquim and Netto estimate that the PPP reduced job losses at eligible firms by 12.9 percentage points, which translates to saving roughly 7.5 million jobs at a cost of $70,000 per job.

In the other paper, “Optimal Allocation of Relief Funds: The Case of the Paycheck Protection Program,” the authors argue that funds were not efficiently allocated early in the PPP, and that a policy targeting the smallest firms could have increased the program’s effectiveness significantly.