Memo to Congress: Stop Touting Small Business Job Growth

The financial world spends a lot of time reading the tea leaves in the monthly ADP National Employment Report, which estimates changes in jobs with private employers (that's most of the work force, of course). The report deserves a look, because the data is "real" -- it's a survey from current payroll information, and probably doesn't pass through as many filters as the government data.

But while its broad estimates on the entire labor force seem OK, the ADP Report draws inferences on job trends for small businesses, and based on my research into the job creation question, they don't stand up. While that part of the ADP report may not be what moves the markets, it's still crucially important: politicians and policy makers read this stuff, and if it suits their ends, they build it into their thinking on taxes and the economy.

Once a month ADP, the enormous payroll services company, shares its business trends with the financial markets, providing a preview to the official reports of the Bureau of Labor Statistics that follow in two days.

What has interested me about the ADP report is not the headline estimate, but rather the details of employment in different industries and sizes of companies. I even wrote an extensive post about it a while ago, trying to get behind the issue of job creation by small businesses.

The official numbers from the BLS, which I believe are more accurate, show that small businesses -- those with under 50 people -- have employed about 30 percent of the work force for many years, and created about one-third of the net new jobs. ADP, on the other hand, says that small businesses have employed about 45 percent of people, and created nearly all new jobs.

Why the difference? It's the unit of measure of businesses. The BLS looks at a business as one legal entity -- a corporation or LLP or whatever. There might be two offices, or three stores, or 15 franchises, but it's one business.

ADP, on the other hand, reports its data by payroll locations, which aren't consistent across different companies. Also unfortunate is the ADP report choice of nomenclature -- calling these locations "businesses."

They try to explain the difference in a footnote in their monthly reports, but but unless you're familiar with the quirky form of the data, you still won't know what the footnote means.

I've corresponded with the people that put all this together and discussed the way it's presented. To their credit, they have changed the footnote language a couple of times since, but they don't mention the distortion versus the government's official figures.

If it were my choice, I wouldn't present these figures about small, medium and large "businesses" at all, since the distinctions aren't consistent and sensible, footnoted or not. But to use the correct language, and make assertions about small, medium and large "locations," and then explain why an location may or may not be a business, is likely too wordy and confusing for early-morning sound-bite CNBC, so I guess this will persist.

You might think this is just a David-Goliath tussle from writer who found some nuance and wants to make a fuss. Well, that may be true, but beyond that there are much bigger stakes to the data on company size.

As I noted in my earlier post, once a statement is repeated often enough, people think it's true, and that's what happened with the current Republican leadership in Congress. In October, Representative John Boehner and nine other senior GOP legislators wrote to President Obama, asserting that based on the ADP report, small business were bearing the brunt of the recession's job losses, and that as a result, small businesses deserved a 20 percent tax credit.

If you don't know it already, the phrase "tax cuts for small business" is political cover for tax cuts to wealthy Americans (because in many instances the taxes are passed through to the owners, rather than paid by the business directly). The Republicans' proposed measure would not obligate business owners to hire people with the tax cut -- as stated, it just cuts the tax base and makes the rich richer.

My bottom line: The ADP National Employment Report isn't just a press release that jostles the stock market for a few minutes. It's become a source of sound bites that make their way into the minds of our legislators, and become part of the conventional economic wisdom.

As I've said before, I'm all for small businesses -- I am one -- and I know they are important to job creation, and deserve sensible support. Be sure to read my earlier post on that. But the data underlying our decisions to allocate resources and form our tax policy must be accurate and representative. When it comes to measuring job growth from small businesses, the ADP National Employment Report is not.