Do Small Businesses Create More Jobs?

UPDATE, Friday February 26 -- Unfortunately the data source on which the post below is based turned out to be unreliable. I've revised the post here, relying on an alternate data set from the Bureau of Labor Statistics.

------

When you repeat a statement frequently enough, whether or not it's true, it eventually becomes part of the accepted wisdom; the effectiveness of drip-drip-drip repetition is well known to politicians, advertisers, and haranguing spouses. One of these accepted truths is that in the U.S., "small businesses create the most jobs."

What usually follows that assertion is that because they are the lifeblood of job growth, and thus of the economy, small businesses (or their owners -- that is, people with high incomes) should be encouraged and supported with breaks on their income taxes, health care costs, and the like.

It's not an easy question, either to define or answer.

My intuition, my educated guess, my preconceived notion, has been that when the argument is expressed that way, the statement is not true. Others who have researched it feel that way too. Let's take a look at the facts.

First let's parse the question. Small businesses can be new and innovative, such as garage entrepreneurs. Or they can be new and mainstream - a printing shop, dry cleaner or jewelry maker. I'm not saying that one should be preferred to another, but the innovation angle usually is included in the tax break argument.

And how small is a small business? Fewer than 50 people? Five hundred?

Next, "new jobs" can be gross, or net. That is, a lot of new businesses start up, hire people, and then fail - restaurants come to mind, or on a larger scale a few years ago, dot-coms. So are the new jobs lasting, or just around for a year or two?

Last, job creation is a cyclical thing, so we also have to be careful about the time periods we look at.

The data on this topic is complicated. The government conducts a business census now and then, but this question is not one that they focus on in every report. There is some private data which is useful, but doesn't go back very far.

Here is a simple analysis, drawn from the ADP National Employment Report. This is a monthly report published as a public service by ADP, the big payroll services company. They use their clients as a sample, and from that estimate what's going on in the economy as a whole.

From 2000 through 2010, the period they have been publishing their report, here's the breakdown on the number of people employed, as of each December:

Small (<50 people) 42 to 44%

Medium (50 to 500) 39% (every year!)

Large (>500) 17 to 18%

For 2001 and 2002, when the economy was in a mild recession, small firms lost fewer jobs than their share of employment would suggest. Large companies cut jobs out of proportion to the number of people they employ, and the mediums were about even.

In 2003, the start of the job recovery, the picture is less clear. The percentages don't make a lot of sense so I omit them. The same thing happened in the transition year of 2007.

From 2004 through 2007, a period when employment was growing, the proportion of the gain in jobs was higher at small firms. Growth at medium firms was in line with their employment numbers, and large firms saw minimal growth:

Small (<50 people) 54 to 57% of total jobs gained

Medium (50 to 500) 39 to 41%

Large (>500) 2 to 5%

To summarize so far: when the data are split by small, medium and large, job creation is in favor of small firms. Medium firms are neutral, and large firms are job losers.

But I see a more distinctive picture coming from the split of goods versus services companies. From 2000 to 2009, the start of one recession to the depths of another, the U.S. economy lost 3.5 million jobs, according to ADP. Services sectors, however, gained 3 million, while goods sectors lost 6.5 million. But still, small firms have the best record, with a net employment gain of 1.3 million. From what ADP infers from its client base, over this 10-year period, small business do appear to create more jobs than large ones. (You can read an earlier post on employment in goods versus services here.)

That's it for now -- I will be back with more on this question later, looking at different data sources.

Follow me on Twitter: @johnekeefe