Small Matters: Yes, small businesses do create jobs

Posted: October 10, 2011

"Small-Business Job-Engine Myth Hampers Effort to Lift Employment."

That was the headline on a Sept. 29 report from Bloomberg News that reports: ". . . the notion that small business is the force behind prosperity is not true." The piece cites statistics such as: "Hourly wages at the largest companies, those with more than 2,500 employees, average around $27, compared with $16 in companies with payrolls of fewer than 100."

Apparently, that is proof that small businesses are of little value.

Out of six million employer firms in the United States, only 3,900 are large enough to have 2,500-person workforces. If this is such a good deal, why aren't all firms that size? Maybe a barbershop with 2,500 chairs is not economical and too large to serve a local market? Maybe wages are better at larger firms because they are specialized (high-tech, manufacturing) and require better-skilled workers (and not everyone has those skills)?

Markets pay for skills. And maybe an economy full of these firms would not be able to provide the kinds of goods and services or convenience we like. There'd be no more 7- Elevens, just a few 2,500-worker grocery stores.

The report continues: "Most small firms are restaurants, skilled professionals or craftsmen (doctors, plumbers), professional and general-service providers (clergy, travel agents, beauticians), and independent retailers. Most of these companies are going to remain small."

This is bad? If all those big firms hired 500 new workers in a month, an unlikely outcome even in good times, that would add about two million new jobs, just a few more than filed initial claims for unemployment in September - 1.6 million. It was 1.2 million per month in 2000, a year of record high employment.

Statistically, new firms are less productive than existing firms because it takes time to build the business to capacity, maturity. So I guess any new firm must start at "maturity," or we should reject it. Bill Gates should have worked for someone else since Microsoft could not have been started at the mature level it is today.

More fundamentally, the article exhibits no understanding of the main driver of job growth and confuses our current problem of weak demand (not all the barber chairs are filled) with the factors that cause job growth (population growth), the need for more barbershops, and the jobs this creates.

An economy with zero population growth has no job growth in the long run (business cycles like the present one can create lower employment temporarily.) More people need more barbershops, clinics, and all those small firms the report belittles. Yes, those firms don't grow big very often, but it is the proliferation of these firms that accounts for the fact that over the last 20 years, two-thirds of the net new jobs are created by small firms.

Sure, more manufactured goods are needed, too, but those are produced with fewer and fewer workers over time (productivity) and are not big job generators.

So here are the facts, from the Small Business Administration website: 99.7 percent of all employers are small (under 500 employees), 90 percent have fewer than 20 employees yet produced 65 percent of the new jobs in the last 17 years, produced more than half of private GDP, made up 97.5 percent of identified exporters, and produced 13 times more patents per employee than large patenting firms.

Small business is the research and development for the economy, where new ideas, products, processes are tested in the market. Good ideas are rewarded with profits, the others "reprice" their assets and try again.

So what if "many go bust"? These are trials, looking for the best managers and ideas, letting markets (consumers) pick the winners, not the government. In a growing U.S. economy, 500,000 businesses terminate each year, but 600,000 new ones are started, and lots of people are employed and gain experience and training in the process.

The greatness of our economy is the result of those processes. And, small firms don't need tax incentives to hire. They need customers. So get it together in Washington and restore consumer confidence; 130 million workers spending more is a great stimulus, and a reason to hire. That would solve the unemployment problem.

Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at

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