Do Small Businesses Create More Jobs? Another Look

Last Updated Apr 1, 2010 6:04 PM EDT

To repeat from a couple of days ago: for what seems forever, I have heard that small businesses create more jobs in the U.S. than large businesses do. But the idea has never made sense to me: big companies have more resources to throw around, and need more people.

But the numbers themselves are not important: where the issue really matters is in tax policy, when politicians call for "tax breaks for small business," to provide incentives for small businesses to expand because "they're the lifeblood of the economy." But whether it's the Republican approach, to cut tax rates on the owners, or more direct subsidies on the costs of hiring people, as incorporated in the Democratic-sponsored pending $15 billion jobs bill, or something else that would increase their sales, do the economic numbers support the focus on small businesses?

Lately I've spent a fair amount of time researching the large/small debate, with no clear answer yet. It's not an easy issue, and a lot depends on how you frame the question -- gross versus net, how small is small, etc.

Monday I cited the ADP National Employment Report, over the period from 2000 to the present, which suggests that not only do small businesses employ more people than large ones, they also have created more jobs, and by a substantial margin.

But I looked at other data, and questions popped up about the quality of the ADP survey. The consulting firm that compiles the analysis hasn't responded to several requests for clarification -- ahem -- so I am going to back away from that analysis entirely and start over.

(UPDATE: Eventually the head of the firm did contact me, but his explanation was thoroughly unsatisfactory, so we're still giving up on the ADP survey.)

(SECOND UPDATE: My friend Diane told me a fitting economist joke. Ask an economist for a tuna salad sandwich, and he can tell you everything that goes into it, but he can't make one.)

Let's forget that initial conclusion and move on to more solid ground.

The Bureau of Labor Statistics keeps a close watch on the opening and closing of firms, and job gains and losses, categorized by business sizes.

Here is the distribution of employment by firm size compiled by the BLS. There are more size categories, but I have condensed them:

These proportions make sense -- sure, there are plenty of small businesses in the US, but the critical mass is at the big firms. About 40 percent of the private work force is at firms with over 1,000 employees. The shares have been stable over time, although slightly more concentrated in big firms since the late 1990s.

Back to job creation. Think this through -- if the shares of jobs at small, medium and large have not changed much over 15 years, then they are hiring in roughly the same proportions, right? There might be fluctuations here and there, but if small firms were doing all the hiring, the shares would be changing in favor of smaller firms.

Here is another analysis from the BLS, of jobs added and lost from 1992 to 2009. It shows the quarterly average -- not the way I would show it -- but it moves us along. (I will show a time series in another post.)

Note the details, differentiating new firms from those that are expanding or contracting. This is the point where the confusion and distortion creeps in.

On average, small firms that were growing hired about 2.4 million people per quarter, but fired just slightly less. For small firms that were just getting started, hiring averaged 951,000, and firms shutting down laid off 910,000. That's a lot of activity for just 88,000 net new jobs on average.

The net numbers are not meaningfully different for medium and large firms, although the gross numbers are lower. I imagine that has to do with the nature of small businesses -- high turnover in retail and food service, as well as rapid opening and closing of firms themselves.

The bottom line: yes, small businesses do create more jobs, but in the aggregate it's only temporarily. But that's not to say that they don't deserve support from the government. We don't have a formal industrial policy in the U.S., but let's face it, there are all sorts of subsidies all over the economy that only big companies, or companies in certain industries, can take advantage of.

So small businesses create about as many jobs as large ones, says the table above. Should the U.S. taxpayer give breaks to small business? As long they create jobs (rather than just enrich the owners) -- absolutely.

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