The great rallying cry from local businesses and government leaders is that small companies are important because they create most of the jobs in our economy.
Unveiling a $447 billion jobs bill in September 2011, President Barack Obama told Congress: “Everyone here knows that small businesses are where most new jobs begin.”
Also in September, COO Sheryl Sandberg of Facebook announced a program to give $10 million advertising credit to small business owners. “Small businesses are the backbone of the American economy,” Sandberg said.
But is all of this really true?
The notion that small businesses create all the jobs in the American economy is a hoax, writes Charles Kenny in a recent article in Bloomberg Business Week.
“In the popular imagination, small firms are more nimble, more innovative, and more virtuous than blue-chip companies that employ thousands,” said Kenny. “Yet the notion that small business is the force behind prosperity is not true."
As proof, Kenny cites the following statistics:
In 2007, there were around 6 million companies with workers on the payroll. Ninety percent of those businesses employed fewer than 20 people, according to analysis of the latest census data by Erik Hurst and Ben Pugsley of the University of Chicago. Collectively, those companies accounted for 20 percent of all jobs….
Eighty percent of U.S. small companies that remained in business from 2000 to 2003—the most recent period for which Hurst and Pugsley compiled data—didn’t add a single employee…. Looking at a sample of companies created from 2004 to 2008, Hurst and Pugsley found that only 3 percent added more than 10 employees during that time.
Kenny further contends if job seekers want well-paid stable jobs, they should look at big companies.
“Hourly wages at the largest companies, those with more than 2,500 employees, average around $27, compared with $16 in companies with payrolls of fewer than 100,” said Kenny. “Companies with more than 100 workers are almost twice as likely to offer retirement benefits and insurance."
His conclusion is that size does matter for creating jobs and, in fact, he suggests a change in economic policy: "Although politically unpopular, attracting more large companies from China and India to set up shop in the U.S. could be a better use of resources than providing yet more tax breaks and loan guarantees for small business.”
Professor Scott Shane, professor of Entrepreneurial Studies at Case Western Reserve University, insists that every business creates jobs. Shane believes that “the question is how to get more jobs and...get them from all kinds of businesses.
"There was a period when small businesses were creating more jobs than big businesses, and right now that’s not the case," said Shane in an interview. "It's a cause for concern that they were once big job creators and they’re falling behind.“
Shane thinks the current lack of bank credit is at fault.
"Small businesses are very dependent on the banking system for credit,” said Shane. “Big businesses can issue bonds with low interest rates and get the credit that they need."
A second problem is that “small businesses are also disproportionately affected by uncertainty about the direction of the country,” said Shane. “Because they don’t have big staffing lobbyists in Washington to figure out what’s going on, when the policy uncertainty is at very high levels, the small business willingness to hire is at low levels. “
Recent surveys of small-business owners confirm this view. More than 75 percent of the SMBs report their staffing levels held steady," according to a new survey by Zoomerang and Grow Biz Media. Only 20 percent of those surveyed plan to add staff in 2012.
The small-business sector that used to create a lot of jobs is now held back by current economic policies. We need the FDIC and private banks to lend more money so small businesses can hire again.
Temporary “policies” also hurt the will of small business owners to hire. The one-year payroll-tax cut, for instance, hinders hiring decisions. How can any small business invest in hiring more employees when the future is so uncertain and bank credit can be revoked at any time?
Our economy needs more jobs. With more than 90 percent of all companies in America classified as small businesses, unemployment will only go down when those businesses start to hire again.
What would you do to fix it?