The Tail That Wagged the Dog: What Explains the Persistent Employment Effect of the 10-Day PPP Funding Delay? 
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.
Key Findings
- The share of PPP loans delayed was significantly larger in the top 1 percent of urban counties by population than in all the other counties.
- These most populous counties entirely account for the importance of the share of PPP loans delayed in explaining the slow employment recovery. The share of loans delayed had neither a significant nor a persistent impact on the employment recovery in the remaining 99 percent of urban counties, and it had no explanatory power for the recovery in rural counties.
- A larger persistent shift to remote work in the most populous urban counties likely took a lasting toll on local employment in these areas.
- Employment recovery of the most adversely affected industries, including leisure and hospitality, was not significantly associated with the share of PPP loans delayed to firms in those industries.
- Evidence from business foot traffic shows that businesses that borrowed just after the 10-day pause as well as those that borrowed just before it benefitted substantially from receiving PPP loans, and receiving a PPP loan was much more important than receiving it a little earlier. Early and late borrowers both saw significantly more customer visits starting in the second half of 2020 and significantly fewer closures relative to narrowly matched peer businesses in the same industries and same areas that did not receive loans.
- Comparing the relative contributions of three components of the CARES Act, the authors find that extra unemployment benefits (negatively) and tax rebates (positively) affected the employment recovery more than the PPP did.
Implications
The paper’s findings support the idea that the pandemic caused fundamental damage to the economic advantage of densely populated central business districts and that this damage—not the delay of credit—explains the slower and shallower recovery of employment in those places. The findings also suggest that in a pandemic, the availability of public transfer payments and credit assistance matter more than a slight difference in the timing of funding receipt in shaping the recovery from the crisis.
Abstract
This study explores the mechanisms explaining the large, persistent effect of the 10-day funding delay in the 2020 Paycheck Protection Program (PPP) on employment recovery during the COVID-19 pandemic, as estimated by Doniger and Kay (2021). We find that the top 1 percent of urban counties by population fully account for the significant effect of the delay on county-level employment. The strong correlation between worse loan delay and slower employment growth in these counties is due to a factor commonly omitted from analyses: The nature of business and the high rate of human interactions in major urban centers render these areas exceptionally and persistently vulnerable to infectious diseases. Moreover, we find that receiving more PPP funding and more transfers from other pandemic-related assistance programs contributed significantly more to local economic recovery compared with receiving PPP funds earlier.