Why Small Businesses Won't Be the Nation's Job-Creating Machines

I'm all in favor of employing government policy to expand small business access to capital. After all, the Fed-engineered record-low interest rates are providing the equivalent of a fire hose-sized feed of cheap financing for big companies that are tapping the corporate bond market for billions to stock their competitive war chests. In the interest of fairness, something like the Small Business Jobs Act is definitely called for.

But it doesn't do anyone a service to sell a business-assistance program on the basis of faulty data or flawed logic. And that's what is happening when policymakers, pro-business groups and others proclaim, as Colorado Governor Bill Ritter did, that "small businesses are the job-creating engine of our economy."

That's not quite right. The issue has been examined repeatedly and in a variety of ways by a number of researchers. One of the most recent studies, a 2010 working paper from the National Bureau of Economic Research, reiterates: There is no strong relationship between company size and contribution to employment growth. Translation: Small businesses are not the job-creating engine of our economy.

This is not the same thing as saying that big, established companies are the real job magicians. Companies over 10 years old with more than 500 workers do indeed account for about 45 percent of jobs, the authors found. But the same firms accounted about the same amount of job creation, they add.

The real indicator for growth, according to the authors, is age. That is, young companies and especially startups are more likely to add jobs than older firms. "Business startups contribute substantially to both gross and net job creation," the authors conclude. Specifically, they found that startups account for only 3 percent of employment but almost 20 percent of gross job creation.

This finding isn't likely to lay the issue to rest, although it came from a credible team of researchers consisting of two Census Bureau demographers and a University of Maryland economics professor. As the authors note, "the notion that growth is negatively related to firm size remains appealing to policymakers and small business advocates."

But The Debunker will do its part to illuminate the darkness. And if you're one of those company-starting entrepreneurs, by all means, look for funding from the sources lubricated by the Small Business Jobs Act. It's in everybody's best interest for a job-creating company-builder to use a government-backed loan to pursue growth. You might even say it's your patriotic duty.

Mark Henricks has reported on business, technology and other topics for The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications. Follow him on Twitter @bizmyths.

Help Wanted image courtesy of Flickr user E. Bartholomew, CC2.0