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With more than 14 million Americans out of work and the U.S. facing the prospect of a double-dip recession, it’s heartening to know that Democrats and Republicans agree on at least one way to kick-start growth: support small business. “Everyone here knows that small businesses are where most new jobs begin,” President Barack Obama said in his Sept. 8 address to Congress, unveiling a $447 billion jobs bill.
Republicans who were initially responsive to the speech have since slammed Obama for introducing what House Speaker John Boehner calls “job-killing small business tax hikes.” Politicians aren’t the only ones rushing to champion small businesses. In announcing a program to give $10 million in credits to small business advertisers on Facebook, Chief Operating Officer Sheryl Sandberg said on Sept. 26 that “small businesses are the backbone of the American economy.”
Most Americans would probably concur. The idea of small businesses as indispensable to the national welfare dates to Thomas Jefferson’s veneration of the yeoman farmer. In the popular imagination, small firms are more nimble, more innovative, and more virtuous than blue-chip companies that employ thousands. Yet the notion that small business is the force behind prosperity is not true. The longer the U.S. and other countries cling to this myth, the harder it will be to carry out the kinds of economic policies that might actually stimulate job growth.
In the U.S. in 2007 there were around 6 million companies with workers on the payroll. Ninety percent of those businesses employed fewer than 20 people, according to analysis of the latest census data by Erik Hurst and Ben Pugsley of the University of Chicago. Collectively, those companies accounted for 20 percent of all jobs. Most small employers are restaurateurs, skilled professionals or craftsmen (doctors, plumbers), professional and general service providers (clergy, travel agents, beauticians), and independent retailers. These aren’t sectors of the economy where product costs drop a lot as the firm grows, so most of these companies are going to remain small. And according to Hurst and Pugsley’s survey evidence, the majority of small business owners say that’s precisely their intent—they didn’t start a business for the money but for the flexibility and freedom. Most have no plans to grow.
Some small companies do grow, of course. Think Apple or Hewlett-Packard, which were initially run out of garages, or Google, created by two guys in a dorm room. But the vast majority of small enterprises stay small. Eighty percent of U.S. small companies that remained in business from 2000 to 2003—the most recent period for which Hurst and Pugsley compiled data—didn’t add a single employee.
Looking at a sample of companies created from 2004 to 2008, Hurst and Pugsley found that only 3 percent added more than 10 employees during that time. An even smaller proportion had applied or were in the process of applying for patents. (So much for being seedbeds of innovation.) Many small businesses simply go bust after a few years. In 2009 economist Scott Shane at Case Western Reserve University surveyed the evidence on net job creation by each year’s cohort of new companies. He found that among small companies in their second year of business, more jobs were lost to bankruptcy than were added by those still operating. The same was true in years three, four, and five.
If you’re looking for a lot of good-paying, stable jobs, you’d better hope there are some big companies around that want to hire. Kansas City Federal Reserve economist Kelly D. Edmiston’s analysis of U.S. data found that each year, 22 percent of staff in companies with fewer than 100 employees quit or are fired, compared with only 8 percent for companies with 2,000 or more workers. Edmiston also found that the jobs offered at large businesses were better than those at small businesses. 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. Companies with more than 100 workers are almost twice as likely to offer retirement benefits and insurance, and considerably more likely to offer health care.
©2011 Bloomberg L.P. All Rights Reserved.
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