Small Matters: Small business a big factor in job creation

A First Financial Group training session for new employees in Bala Cynwyd. The insurance agency, a small business, said earlier this year that it expected to hire 35 people in 2011.
A First Financial Group training session for new employees in Bala Cynwyd. The insurance agency, a small business, said earlier this year that it expected to hire 35 people in 2011. (TOM GRALISH / Staff Photographer)
Posted: July 04, 2011

When you read the paper, the news is mostly about big business: GM goes bankrupt. Microsoft releases a new operating system. Goldman Sachs posts record profits.

You would think that all businesses in America were big corporations. The president appoints the chief executive officer of General Electric Co., no less, to head up a commission on job creation. GE makes all kinds of stuff and lends money as well, a big financial institution. It employs 300,000 people worldwide, about half in the United States.

But let's put it in perspective. Every week now, more than 400,000 people in the nation file for initial unemployment claims - 428,000 just last week. These people were fired or laid off, and they amount to more than all of GE's employment for a year. That's 1.6 million people a month losing jobs, nearly 20 million people a year.

Yet every year, major recessions excepted, more and more people have jobs. A recent U.S. Bureau of Labor Statistics report indicated that more than 200,000 new jobs were created in a month. So if, say, 1.6 million people were laid off or fired in a given month, we must have hired 1.8 million workers.

That's what job growth in the United States looks like. Labor is the most important asset that the country - or any firm - has, and it is important that workers be free to seek the best pay they can find and that employers be able to adjust their workforces to produce their goods and services at the lowest cost for consumers.

So, if GE and other large corporations aren't big players in job creation, who produces all the new jobs in America? The answer is small business.

These businesses do everything, including building most of the houses constructed in America. Small business employs 67 percent of the private-sector workforce and pays out 44 percent of the private payroll. As the population grows, small firms provide the bulk of the new jobs needed. For many, small business provides their first experience in the world of work.

As important as small firms are, they are relatively neglected in policy circles in Washington and state capitals, where large companies and their lobbyists exert their influence. It is not unusual for a bill passed by Congress to contain provisions for a single big firm, but your local small business will never experience such attention. Nonetheless, the importance of small businesses to our economy certainly merits more attention - not in the way of subsidies and favors, but in less interference with their job-creating activity.

The Small Business Administration estimates that there were about 28 million businesses in the nation in 2007. The vast majority of these were "small," with fewer than 500 employees.

There are multitudes of businesses with no employees (and an estimated $1 trillion in receipts). These one-person firms provide a good living to the entrepreneur.

Millions more people earn money in part-time ventures. It is where most of us get our first jobs, "on-the-job training," the entry-level jobs that serve as the launchpad for future employment. For many, the way to higher education or a first car is financed by this kind of work.

Nearly 1.5 million companies have annual sales under $100,000, and nearly four million others earn less than $500,000 in revenue. Ten million people work for these smallest of employers. These are not GEs or Microsofts, but they provide jobs and fill needs for millions of Americans.

In Philadelphia, we have about 32,000 establishments, 26,000 with fewer than 20 employees - lots of small firms providing an estimated 165,000 jobs.

That's the backbone of our economy. About 24,000 of those jobs are in health services.

Using the Small Business Administration's definition of a small business (fewer than 500 employees) takes the total employment in the small-business sector to around 360,000, about 70 percent of the total employment in the city.

It is important that we maintain a healthy environment for these firms to start, grow, and provide more jobs for Philadelphia. What makes for a healthy environment? One in which government does not weigh down employers with too much regulation.


Bill Dunkelberg is a professor of economics at Temple University and a nationally renowned expert on small business. Contact him at dunk@temple.edu.

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