In a significant move, President Donald Trump initiated the dismantling of affirmative action programs at the federal level early in his second term. This decision, while gaining considerable attention, was preceded by similar actions in several states where preferences for contractors had been phased out, some even years beforehand.
The experiences of these states now offer insights into how businesses owned by underrepresented groups are affected post-ban.
As an economist who has examined the effects of state-level affirmative action bans, I discovered a complex landscape with unexpected outcomes. While the average workforce size in minority- and women-owned contracting businesses decreased, these companies largely continued operations.
This topic is crucial not just due to the political sensitivity surrounding affirmative action, but also because of the substantial financial implications: Approximately 10% of the U.S. GDP is spent on federal and state contractors, acquiring everything from office supplies to advanced defense systems.
State-Level Shifts
Historically, both federal and state governments have implemented affirmative action to support minority- and women-owned businesses. However, recent years have seen growing opposition to these initiatives, leading several states to abandon such practices, including their use in contracting. A notable case is Indiana, where the attorney general declared these preferences unconstitutional in July 2026.
Analyzing nine states that had eliminated affirmative action in contracting by 2020, affecting 114,000 employers, reveals significant adaptations among impacted businesses. A prominent finding is a workforce reduction: five years post-ban, these enterprises had 11% fewer employees compared to non-minority- or women-owned firms.
Particularly hard hit were Black-owned businesses, which cut their workforce by approximately 19%, surpassing the early COVID-19 layoff figures. Large minority- and women-owned firms also experienced notable reductions of around 13% in their workforce.
The bans also stifled new business creation, with an average annual reduction of 35 startups in states enacting these bans. Yet, minority- and women-owned contractors showed resilience, as evidence suggests they were not more likely to shut down than before.
A closer look at regional impacts indicates that metropolitan counties witnessed the most considerable relative decline in the size of affected firms. Conversely, states with smaller minority populations experienced lesser impacts on company size. These findings highlight that the effects of these bans are not uniform across different states.
An intriguing conclusion is that these bans did not influence the likelihood of these contractors going out of business. In fact, post-ban, minority- and women-owned companies showed a lower risk of closure compared to other businesses.
This outcome might initially seem counterintuitive, especially given the reduction in business size. However, state bans led to a roughly 9% decline in long-term productivity and a 10% decrease in company value, regardless of whether the business was sold.
Overall, although these contractors did not close more frequently, the affirmative action bans resulted in downsizing compared to firms not owned by minorities and women. The corresponding drop in workforce numbers likely led to decreased productivity due to fewer contracting opportunities.
These state changes, now mirrored at the federal level, underscore the need to understand how affirmative action bans affect underrepresented businesses to help policymakers anticipate future outcomes.
Ongoing Questions
Several questions remain unanswered. While my research explored how these contractors adapt to bans, there is still a lack of precise data on the financial impact, such as the loss in contract dollars, except in specific cases.
Additionally, the implications of eliminating affirmative action at the federal level require further exploration. Although previous legal decisions have restricted its application, the current federal efforts to abolish affirmative action are relatively new. Continued research is essential to comprehend these changes fully.
