The Small Business Workforce Challenge: Causes, Impacts and Solutions

On June 8, 2022, Brookings Metro Fellow Annelies Goger testified to the U.S. Senate Committee on Small Business & Entrepreneurship, during a hearing titled The Small Business Workforce Challenge: Causes, Impacts and Solutions. Goger started her testimony with a personal story about her father’s small business challenges. She then explained a “perfect storm” of factors that are combining to exacerbate the pain that small businesses are feeling when it comes to finding, hiring, and retaining talent.

Goger noted several pandemic-related factors: A) Lower immigration; B) Higher death rates related to COVID-19; C) Lack of childcare; and D) Friction in job reallocation. Additionally, Goger emphasized several long-term trends contributing to small business difficulties, including: A) Demographic shifts; B) Underinvestment and uneven investment in talent; C) Discrimination and stigma; D) Untapped talent; and E) Digitalization of work.

To address these pandemic-related factors and long-term trends, Goger proposes a set of short- and medium term, and lasting, solutions aimed at the talent challenges that small businesses are experiencing.

Short- and medium-term responses:

• Support policies to expand legal immigration and address delays in processing of work visas, potentially identifying industries of highest priority with the most openings.
• To adapt policy to the modern economy, consider expanding the Manufacturing Extension Partnership (MEP) concept beyond manufacturing, such as services. Managers could benefit from learning effective practices for hiring and retaining a diverse workforce, evaluating the costs and benefits of their training and technology investments, or promising practices for expanding the pool of workers that they target to recruit to reach talent that are often excluded such as returning citizens, older workers, and youth.

Lasting solutions:

• Incentivizing employers to train their workforce through reimbursements to medium-sized employers and creating mechanisms for small businesses to pool resources (e.g., through sector councils or trade associations), to share training costs such as through community training centers or sharing human resources staff. With the right institutional mechanisms, small businesses could also pool resources to lower the cost of each individual business for benefits like health insurance or childcare, and other major costs such as liability insurance or e-commerce / delivery platforms.
• Consider funding low-interest financing for small businesses, especially in regions and communities that were disproportionately impacted by the pandemic. This could help revitalize commercial districts and ensure that more capital recirculates in the community through local ownership.
• Make apprenticeships and other earn-and-learn opportunities easier and cheaper for small and medium sized businesses to sponsor. Specifically, public sector support could help with start-up funding and state infrastructure to scale earn-and-learn opportunities, as well as permanent funding streams to support related classroom instruction and intermediary support for organizations that work with learners, educators, and employers.
• Revisit our approach to layoffs and rapid response: The WARN Act system was designed for large scale manufacturing layoffs. It doesn’t capture concentrated layoffs of small firms in one place, nor is it particularly geared towards the needs of service sector small businesses. Having more support available to struggling firms early would help make economic shocks and transitions less painful for small businesses and workers and enables small businesses to take advantage of programs that they may not be aware of, such as Short Time Compensation or Work Share rather than laying someone off.

Overall, Goger argues for three shifts:

• From employers as consumers of talent to employers as co-producers of talent: engaging and incentivizing more work-based learning
• From programs to systems: shifting away from separate, siloed funding streams that are often duplicative, to a more integrated system that small businesses can participate in and share the cost burden with education partners, intermediaries, and other employers with similar talent needs
• From charity to the business case for diversity and inclusion: leveraging the latent potential of diverse talent and leaders who are underrepresented in quality jobs and higher education would increase innovation revenue and generate shared prosperity

To read Goger’s full testimony, click here. To watch the testimony video, click here.