Adapting to change: the impact of environmental and labor market shocks on small businesses in the United States.
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Wang, Mingxun
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Abstract
This dissertation examines the economic fragility of small businesses in the face of localized environmental and labor market shocks. Small businesses are a vital component of the U.S. economy, accounting for over 90% of all establishments and contributing nearly half of non-farm GDP. Despite their macroeconomic importance, small businesses operate with thinner profit margins, limited access to credit, and reduced pricing power. These characteristics make them more vulnerable to external disruptions compared to larger firms. Yet, research on small business resilience has been constrained by data limitations and has often focused on large, publicly listed firms.
Motivated by these gaps, this dissertation leverages a proprietary dataset from a major U.S. payment processor that captures real-time transaction activity for over 15 million establishments. With high-frequency, granular data across multiple years and geographies, the dissertation sheds light on how small businesses respond to transient but economically meaningful shocks, specifically extreme temperature events and localized minimum wage increases. By focusing on both the direct and spillover effects of these shocks, the essays provide novel evidence on how temporary events can generate persistent inancial consequences for small firms, with broader implications for income, employment, and regional economic activity.
The first essay analyzes the economic impact of temperature shocks on 15 million small businesses. For unusual heat (cold) events, based on local historical temperatures, I find a decrease in sales by 7.2% (11.6%). Young, small, and discretionary merchants and those with higher sales volatility experience a stronger negative impact. Negative effects are amplified during weekends and prolonged cold spells. A one standard deviation increase in hot days (8.4 days) in a year raises the exit rate by 4.7%. Lost sales are not recovered on normal days, indicating a permanent loss rather than a delayed recovery. This decline further contributes to macroeconomic reductions in total income and employment levels. In contrast to the previous literature, my results show that heat and cold shocks can adversely impact small businesses. My results highlight the economic fragility of small businesses in the longer-term due to temporary, short-lived temperature shocks.
The second essay studies the effects of city- and county-level minimum wage increases on small business performance, focusing on both direct impacts and regional spillovers. Using a novel dataset covering 15 million small businesses from a major U.S. payment processor and a stacked event study design, I find that local minimum wage hikes lead to sharp and persistent declines in sales and customer traffic, with effects ranging from 5% to 10% for dining restaurants in directly impacted ZIP codes. These revenue losses attenuate with distance and extend up to 50 miles beyond policy boundaries, consistent with regional wage spillovers. Leveraging establishment-level variation, I find that newer, smaller, and more volatile businesses experience significantly larger revenue declines, as do those in highly competitive markets with limited pricing power. County-level wage data further confirm that dining-sector wages increase not only in policy-implementing counties but also in adjacent ones, particularly those with lower income, tighter labor markets, and lower marginal commuting costs. These results highlight the broader economic reach of local labor policies and the trade-offs between wage regulation and small business sustainability.
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2025-04-28
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Dissertation