“Small business” is often trumpeted as the miracle cure for employment and job creation.A closer look at the numbers shows a more complicated picture, and confirms that a comprehensive approach is needed even for the single goal of boosting employment in community development plans.
A community’s goals for development frequently include increasing the income of its residents. This makes perfect sense since the benefits of more income ripple through a neighborhood or a region. It is widely acknowledged that higher incomes correlate to greater family stability, attraction of new businesses, improved health and safety, higher educational attainment, increased tax bases for infrastructure and schools, and so on.
Of many strategies that can increase income, one in particular seems to be heralded above the rest – the attraction or creation of “small businesses.” How often have we heard statements like “Small businesses account for half of the jobs in the country,” or “Small businesses create two-thirds of the new jobs nationwide”? If these statements are true, then small business development should indeed play a central role in employment strategies.
At one level, those numbers appear to be correct. BUT, it’s important to know that they are based on the Small Business Administration (SBA) definition that small businesses employ up to 499 workers. Unless a community believes it can expect to add businesses of that size in the near-term, relying on those gross job statistics will lead to unrealistic employment projections and misallocation of scarce resources. Understanding the employment generated by subsets of the small business category can help to select strategies appropriate to each community’s potential.
Here’s how the job numbers are distributed for smaller companies, according to census information on the employment size of firms:
- At the smallest end of the scale, businesses with fewer than 20 employees – roughly 5.2 million firms – employ about 18% of the workforce.
- Moving up to include firms with fewer than 100 employees, small businesses account for 35% of the country’s workers.
These numbers show that there are indeed significant employment opportunities in the smallest businesses, but they also demonstrate that most people find jobs in larger companies.
Those numbers show the distribution of existing jobs. Let’s also look at the question of creating new jobs. What about the figure that small businesses create nearly two-thirds of them? In fact, research does not show any direct connection between job creation and the size of businesses. The age of a business is far more important. Young firms growing from small to large are the key sources of job creation. Once the age of firms is corrected for, the National Bureau of Economic Research, a nonpartisan economic research organization, has found “no systematic relationship” between company size and job creation. And census data shows that net employment growth declines as firms of all sizes get older.
Jobs with small firms also appear to pay less than large firms. Writing for the Washington Post in 2013, J.D. Harrison found that “large firms have historically paid significantly higher salaries than their smaller counterparts. On average, small business employees currently earn about 50 percent lower wages than those paid to workers at large companies.”
Another figure that the media and politicians often report is that 8 or 9 out of 10 new businesses fail. (The presumption is that new businesses are small, though this will not always be so.) In this case, the real story is actually more encouraging. The Small Business Administration reported in 2012 that “about half of all new establishments survive five years or more and about one-third survive 10 years or more.” There is more good news when the meaning of “survival” is clarified. In a 2002 study, the SBA found that one-third of firms were “successful” when they closed. “It appears that many owners may have executed a planned exit strategy, closed a business without excess debt, sold a viable business, or retired from the work force,” they reported. In some of these cases, therefore, the closing of a firm may not have led to the elimination of jobs.
The census data on companies provides information on one additional item relevant to to this review of how people earn income. There are approximately 22 million businesses with no employees, structured as sole proprietorships. These people who are self-employed may generate income for themselves, but they create no jobs for anyone else. That is almost 80% of all companies in the United States. Though large in number, they are small in economic impact, reflecting just 4% of business sales. And, two-thirds of them take in total receipts of less than $50,000. (That is obviously not all profit or income, as it has to cover all of the business’s expenses and taxes as well.) So, like the role for small businesses, self-employment may be a useful strategy for income generation for some, but its potential must be kept in the proper perspective.
Understanding these employment patterns can help keep small business development in an appropriate place when pursuing the employment goals of community development. The message seems clear: support for small businesses alone is not a magic bullet. The data point to many possible approaches. Here are a few of them:
- There is clearly a place for supporting very small businesses.
- There may be as much benefit in helping with the survival and growth of existing businesses as there is in aiding new start-ups.
- If a community has access to existing, larger “small” businesses in the range of 100 – 500 employees, promoting the health of those firms and generating their hiring from the community is equally important.
- Small-scale entrepreneurship can be successful for people who have the skills to be self-employed but is not likely to directly create additional jobs.
- Since half of Americans work for large businesses, employment strategies should include access to those employers when relevant, which may entail transportation strategies.
- Education strategies are needed for people to access good paying jobs in any size firm.
Even within the single goal of boosting employment, plans must include diversified strategies, reinforcing the reality that all community development must be comprehensive to succeed.
Steven Redfield is a nonprofit executive with three decades of experience in education, workforce development and leadership training. He most recently served as the Managing Director of Training for the National office of Coro, a network of organizations that provide training for leadership and citizen engagement in the public arena. He currently provides consulting services in organizational development, staff development, policy analysis, facilitation and teambuilding, and fundraising.