The Amazon HQ2 Effect on Small Business Hiring

What’s the biggest change to hit small and medium-sized businesses over the last 20 years? Talk to SMB owners and you’ll get a pretty consistent answer: Amazon. Some love it. They see their products reach people they never before could have and feel they have more customers than ever. Others don’t. The mighty Amazon reaches every product and every place, and with remarkably low overhead and customers increasingly comfortable shopping online, many retailers find it almost impossible to compete.

It’s unlikely that Amazon’s role in the marketplace will change any time soon. What will change? Amazon is getting a second headquarters, and one lucky city is going to get a big labor market shock. When that happens, what will happen to local SMB’s? Are they as lucky, watching as a flood of new workers pours into the city and luring some high quality candidates away over time? Or are they unlucky, as it gets harder and harder to compete for local workers? Is it possible to predict?

To put this to the test, we looked at how some of the biggest companies in the US affect SMB’s in the same city and industry. We took Forbes’ lists of the 20 largest private companies and the 25 largest public companies in the US (companies we call “mega-firms”), and traced out how they affect their local labor market. To our surprise, we found consistent evidence that SMB’s competing with these mega-firms for workers face an overall tougher labor market. The full story is below.

The Standard Theory

There’s a pretty convincing logic that says we should expect SMB’s to be better off from having a mega-firm in their same industry and city. The conventional theory goes something like this: Workers are more willing to move across the country for a big firm than a small one, so mega-firms pull new workers into the city. Once there, some decide the mega-firm isn’t for them and start looking for a new job. But with roots already established in the city (perhaps a family, perhaps a house), they’d prefer not to leave. They start considering smaller firms in the area, and after a while SMB’s find that they have access to a bunch of good workers who wouldn’t have been there without the mega-firm.

But when you look at the data, this theory doesn’t really add up. Let’s take it piece by piece.

Problem 1: Mega-firms don’t really help bring in workers

There’s a widespread perception that workers are more willing to move for big firms than for small ones. We do find evidence of that, but there’s really not much of a difference.

Figure 1 shows the fraction of within-city applications and out-of-city applications that go to small, medium, and large firms’ postings. When workers apply to jobs in the city they already live in, large companies get 22% of applications. When workers apply to jobs in other cities, large companies get 23.6% of applications. So cross-city movers put a bit more emphasis on big firms, but not very much. Put differently, small businesses get 40% of applications from workers looking to stay in their same city, but 38.9% of applications from workers looking to switch cities. Is this difference big enough to drive a transformative shift in the pool of available workers? Probably not.

Figure 1. Share of within-city and out-of-city applications targeting each firm size

Some think this process might really show up when looking at highly-educated workers, but not really. For workers with a college degree, large firms get 20.3% of within-city applications, and 21.2% of out-of-city applications. Again, that’s not a difference that will be big enough to draw in a big pool of new workers.

Problem 2: Mega-firms don’t keep workers around

The second key part of the conventional theory is that workers who come for the mega-firm stick around. Turns out that’s suspect, too.

We took ZipRecruiter users who live in the same city and work in the same industry as one of these mega-firms, and compared them to users in the same industry but another city, and workers in the same city but another industry. We estimated the effect of a mega-firm on how many applications those workers sent to other cities (see the Technical Notes for more). The results are in Table 1.

Table 1. Mega-firms increase applications to out-of-city jobs

Worker type:AllLess than collegeCollege degree or moreEarly careerMore experienced
Number of extra out-of-city applications per year due to mega-firm1.531.081.921.541.87


On average, workers in the same city and industry as a mega-firm apply to 1.53 more out-of-city jobs than similar workers do. The effect of a mega-firm is even stronger among college educated workers and those with more experience (meaning the most skilled workers are especially willing to leave), but shows up for all worker types. So workers affected by the mega-firm actually try a bit harder than the typical worker to
get out of their current city. This willingness to leave is really going to dampen any gains local SMB’s could have gotten from workers being pulled in.

Problem 3: These workers don’t shift to other companies

But, of course, not all workers will leave. SMB’s still get the benefit that some of them decide to stick around, right? Maybe not.

We repeated our analysis above (comparing workers in the same city and industry as a mega-firm with those in the same city/different industry and those in a different city/same industry), but this time looked at the total number of same-city applications submitted. Table 2 shows that a mega-firm’s presence substantially reduces the number of local jobs those workers apply to. And like above, this effect is especially strong for more educated and more experienced workers.

Table 2. Mega-firms reduce applications to same-city jobs

Worker type:AllLess than collegeCollege degree or moreEarly careerMore experienced
Number of extra within-city applications per year due to mega-firm-3.48-2.49-3.95-2.96-4.17

One might guess this is because mega-firms are better at retaining workers. But that’s hard to square with Table 1, which showed these workers are submitting more applications to out-of-city jobs. It’s not that these workers never apply to new jobs; it’s that they don’t try to stay in the same city.

The End Result

So how does all this add up? Maybe the conventional theory isn’t the right story, but then what is? What’s the total effect of a mega-firm’s presence on SMB’s ability to find workers?

We estimated how having a mega-firm in the same city and industry affects the number of applications a post receives, compared to a post in the same industry and same job title, but in a different city. The results are shown in Figure 2. To make everything easier to interpret, we show how mega-firms affect applications by showing how many applications are received a company that DOES compete with a mega-firm will get for every 100 received by a company that DOESN’T.

The results aren’t pretty. Companies of every size are affected, with most seeing about a 20% decrease in applications (though companies with roughly 20 employees see an over 40% decrease and those with 250 employees see only a 10% decrease). This is bad news for SMB’s who rely on a rich pool of applicants to find the best talent. It means that for some firms, Amazon’s disruption to hiring might be as big as its disruption to sales.

Figure 2. Mega-firms’ presence reduces total applications received by SMB’s

Conclusion

Since Amazon announced it would establish a second headquarters, cities have scrambled to lure the giant. Public debates have emphasized a wide range of benefits and consequences for the ultimate winner. But there’s an important question that’s been hard to answer: Will small and medium-sized businesses be better off (with all the new talent attracted to the city) or worse off (finding it harder to compete for that talent)?

We’ve done our best to put some evidence behind that question, and we were surprised by our findings. As we said above, there’s a very sensible reason to expect that small businesses can see big gains from sharing a labor market with a mega-firm. That sensible expectation just doesn’t seem to be true.

Our evidence suggests that SMB’s will probably see a few new workers come for Amazon, but not as many as you might have guessed. And those workers don’t show much interest in sticking around or switching to another firm in the same city. Overall, openings at small businesses competing with a mega-firm get fewer applicants than a similar opening would elsewhere.

This isn’t a doomsday prophesy; this is a warning. As cities fall over themselves to impress Amazon, we think they should take a minute to consider what they could do to help out the SMB’s that are already there. There’s nothing wrong with trying to win over Amazon (or any other major employer). But there’s something wrong with ignoring the consequences and failing to prepare for them.

Technical Notes

All analyses are based on ZipRecruiter data from April 1, 2017 to December 31, 2017. For all, the presence of a mega-firm is based on the mega-firm’s industry and its headquarters’ city. Throughout the post, “city” refers to MSA.

Tables 1 and 2 are based on regressions (dependent variable: Number of applications submitted) controlling for education, experience, and fixed effects for industry and for MSA. Coefficients from these regressions are multiplied by 1.333 get the effect on applications per year (since data is only from April 1 onward). Coefficients in Table 1 are occasionally statistically significant. Coefficients in Table 2 are always statistically significant.

Figure 2 is based on regressions (dependent variable: Number of applications received) controlling for log city population and fixed effects for industry and for job title. Separate regressions were run for each firm size category. Coefficients are nearly always statistically significant. Results are not sensitive to the set of controls or whether “applications received” is logged. Because mega-firms don’t establish headquarters in very small MSA’s, we restricted the sample of cities for these regressions to include the set of overlapping support (in terms of population) between cities with a mega-firm HQ and cities without. In practice, this means restricting to MSA’s with 2016 populations between 525,000 and 6.8 million. Cities larger than that all have mega-firms. Cities smaller than that never have mega-firms. Cities in that intermediate range sometimes have mega-firms (like Fayetteville, pop: 527,000) and sometimes do not (like Houston, pop: 6.77 million).

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Mitch Downey is an Assistant Professor of economics at the Institute for International Economic Studies in Stockholm and a former contributor to the ZipRecruiter blog.

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