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When Almost Every American Company Counts As "Small"

Last month I published a controversial post that questioned the role "small businesses" play in terms of job creation and economic growth. I had found an article by Scott Shane, a professor of entrepreneurship at Case Western Reserve University, which argued that public policy shouldn't encourage (almost) everyone to start their own businesses. According to Prof. Shane, many "small businesses," especially under-funded start-ups, aren't really that effective at creating quality jobs over the long haul.

Well, Prof. Shane is back, now writing for the New York Times' Small Business section. He has dug into the data on small businesses, which the SBA defines as those with less than 500 employees, to find out which firms actually create jobs. According to his analysis, firms with 10 employees or less count for 79 percent of all American businesses. But those "microbusinesses" have only created around 15 percent of all jobs between 1992 and 2008. However, firms that employ 50-499 employees, while only around 4 percent of all businesses in America, account for 30 percent of all jobs created. After you see the full article for the rest of the data, you'll see the problem with the term "small business." Almost every company in America has been lumped together as "small."

Start-ups, sole proprietorships and mom and pop shops are obviously important to our economy. But they may not be as significant as we might assume. In fact, another recent study has found that when you look at the proportion of the work force employed by small firms, America actually has one of the developed world's smallest small business sectors. Does anyone really want to trade our economy with Italy's or Greece's?
When we debate how new laws will help or hurt the small business sector, perhaps we should break the category into "small" and "medium" size businesses, as Prof. Shane suggests. Or maybe it's better to divide small firms between those that are start-ups and those that are established. And where does revenue fit into the equation? Should a boutique private equity shop that manages millions count as a small business too?

Just how should we define a "small business" in America?