ECO004 Microenterprise programs leading to increased earnings of employees

Additional average annual employees’ earnings: This is the difference in the average annual earnings before and after the microloan. Employees’ average annual wages post-loan are provided by the grantee. Employees’ average annual wages pre-loan would depend on the demographic characteristics and educational attainment of employees and the industry and type of jobs. The Constellation Funds staff will determine what the appropriate counterfactual wage for the grantee is. Most counterfactual wages used by the Constellation Fund are estimated using American Community Survey (ACS) 5-year estimates from the U.S Census Bureau, (2016).

Total number of years-employees after loan: This is the sum of all employees that worked during the years of operation of all firms. We include up to six years of operations after loan is received. The six-year timeframe is based on survival rates data for firms in Minnesota that show that after six years the survival rates fall below 50%. For example, if the program provides loans to three firms with the following number of years operations and employees after the loan:

Firm 1 was open for eight years after receiving the loan and employs an average of five workers.
Firm 2 was open for four years after receiving the loan and is currently closed. It employed an average of seven workers.
Firm 3 was open for three years after receiving the loan and is currently open, it employs an average of six workers.

The total number of employee-years is: (6 years x 5 workers) + (4 years x 7 workers) + (4.2 years x 6 workers) = 83.2

Note that we only count the first six years of operation of Firm 1. For Firm 2, we only count the four years that it was open. Finally, Firm 3 has been open for three years at the time of the evaluation, but it is possible that it will remain open for three more years. We want to include the potential future earnings that the entrepreneur could earn if the business remains open for a total of six years after the loan. To estimate these potential future benefits, we use survival rates from Rossman, et al (2008) as proxy for the probability that firms currently open but with less than six years of operation will remaining open for six years. These are rates for firms receiving loans from the Small Investment Company Loan Program (SBIC) from the Small Business Administration. This program provides loans to small businesses through community investment intermediaries. We use the lower bound rates to account for smaller, more vulnerable businesses likely to be served by grantees. For example, Firm 3 has been open for three years and the survival rate at year four of start-up firms is 45%, the rate at year five and six are 44% and 35% respectively. Thus, the total number of years we expect Firm 3 to be open is: 3 + 0.45 + 0.44 + 0.35 = 4.2

Note: Discount to present value if benefits are assumed to last for more than 3 years.

Rossman, S., Theodos, B., Brash, R., Gallagher, M., Hayes, C., & Temkin, K. (2008). Key findings from the evaluation of the Small Business Administration’s Loan and Investment Programs. Urban Institute. Retrieved from https://www.urban.org/research/publication/key-findings-evaluation-small-business-administrations-loan-and-investment-programs.

The U.S. Bureau of Labor Statistics. (2013). Business employment dynamics: Establishment age and survival data, Minnesota, Table 7: Survival of private sector establishments by opening year. Retrieved from https://www.bls.gov/bdm/mn_age_total_table7.txt