The Tail That Wagged the Dog: What Explains the Persistent Employment Effect of the 10-Day PPP Funding Delay? The Tail That Wagged the Dog: What Explains the Persistent Employment Effect of the 10-Day PPP Funding Delay?

By Olga Gorbachev, María J. Luengo-Prado, and J. Christina Wang

Lending through the Paycheck Protection Program (PPP) paused on April 16, 2020, when the program’s initial funding ran out, and it resumed 10 days later, on April 27, when Congress authorized additional funding. The PPP, which was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was designed to provide loans that were essentially grants to small businesses disrupted by the COVID-19 pandemic so that they could retain their employees. An influential paper studying the PPP’s effect on employment, Doniger and Kay (2021), finds that cities that had a higher share of PPP loan volume delayed by the 10-day pause in lending saw a slower employment recovery. Doniger and Kay attribute this effect mostly to the importance of liquidity to small businesses.

This paper proposes another plausible explanation for the connection between a locale’s high share of PPP loans delayed and its slow employment recovery. Correctly understanding the mechanism through which the PPP affected the economic recovery is important for designing optimal public policy measures to cushion the economy following major adverse shocks. The authors of this paper argue that it’s reasonable to assume that a pandemic would have a larger adverse effect on economic activity in highly populated cities and for a longer period. At the outset of the crisis, the lockdowns and other public health measures implemented to curtail the spread of COVID-19 led to earlier and greater disruption of commercial activity in these areas and likely also resulted in slower underwriting of PPP loans. Thus, excess loan demand given the larger disruption to economic activity led to a higher share of loans delayed by the 10-day pause. However, these cities suffered more lasting damage from the pandemic in large part because they experienced a more pronounced shift to remote work, which impeded the recovery of local employment supporting office workers, and not necessarily because of the loan delays. The paper’s findings support this explanation for why areas with higher shares of loans delayed by the PPP pause experienced a slower employment recovery.

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