Does Income Inequality Affect Small Firms?

Sebastian Doerr, Thomas Drechsel and Donggyu Lee

No 20231005, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The share of income going to high-income households has increased significantly in the United States in recent decades. In 1980, the average income share of earners in the top 10 percent was around 30 percent. However, by 2015, it had surpassed 45 percent. The employment share of small firms has also declined, with a decrease of approximately 5 percentage points over the same period. In this post, we use variation across states to show a correlation between these two developments, with states having the greatest increase in the upper income share also tending to be those with the biggest job creation declines in small firms compared to large firms. One explanation for this correlation is that the increase in the income share of the highest income earners reduced deposits in small and medium-size banks from what they otherwise would have been. In doing so, this shift in income reduced the available credit for small firms, putting them at a disadvantage relative to large firms.

Keywords: income inequality; job creation; small firms; business dynamism (search for similar items in EconPapers)
JEL-codes: D31 G21 (search for similar items in EconPapers)
Date: 2023-10-05
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