Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Small Businesses, Federal Loans, and Local Employment Growth

Yong Suk Lee*

Last modified: 2012-07-30


I examine the impact of government guaranteed small business loans on local employment. I find that an increase of $10,000 in the Small Business Association's Small Business Loan (SBL) decreases county employment by about 5 people. I also find that a $1 billion increase in the SBL increases the net number of small establishments by about 3.5 but reduces the net number of medium sized firms by about 1 and larger firms by about 0.6 within a county. The SBL can be associated with workers shifting away from larger firms to create their own businesses but at the cost of the health of larger firms and the county's aggregate employment. However, there is also evidence of the SBL being used to create businesses when larger firms go under.  In sum, government guaranteed small business loans do not create local economic growth at the county level and whether or not there is a social welfare argument for such loans warrants further examination

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