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Bill Dunkelberg, The Big Picture: BusinessWeek is Wrong: Small Businesses Create Most Net New Jobs

BusinessWeek is Wrong: Small Businesses Create Most Net New Jobs
by Dr. Bill Dun-kelberg, October 29, 2011

chers—

This Big Picture post takes issue with the Bloomberg / Business Week article Rethinking the Boosterism About Small Business, which maintains that “. . . the notion that small business is the force behind prosperity is not true. The longer the U.S. and other countries cling to this myth, the harder it will be to carry out the kinds of economic policies that might actually stimulate job growth.”

—rk

A recent Bloomberg article entitled “Small-Business Job Engine Myth Hampers Effort to Lift Employment” (September 29) reports “…the notion that small business is the force behind prosperity is not true.” The author cites statistics such as “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” to prove that small businesses are of little value. Out of 6 million employer firms, only 3,900 are this large. If this is such a good deal, why aren’t all firms of that size? Maybe a barber shop with 2,500 chairs is not economical and too large to serve a local market? Maybe wages are better at larger firms because they are specialized (high tech, manufacturing) and require better skilled workers (which not everyone is)? Markets pay for skills. And maybe an economy full of these firms would not be able to provide the kinds of goods and service or convenience we like (no more “7-11”s, we just need a few 2,500 worker grocery stores to drive to?).

Most small firms are restaurants, skilled professionals or craftsmen (doctors, plumbers), professional and general service providers (clergy, travel agents, beauticians), and independent retailers……most of these companies are going to remain small.” I guess the author thinks this is bad. Notice that if all those big firms hired 500 new workers in a month, a very unlikely outcome even in good times, that would add about 2 million new jobs, just a few more than filed initial claims for unemployment last month (1.6 million, it was 1.2 million per month in 2000, a year of record HIGH employment)!

He quotes the view a professor at Case Western Reserve: “Because the average existing firm is more productive than the average new firm, we would be better off economically if we got rid of policies that encouraged a lot of people to start businesses instead of taking jobs working for others.” Now, statistically, new firms are less productive than existing firms since it takes time to build the business to capacity, maturity. So I guess any new firm that starts must start at “maturity” or we should reject it. Bill Gates should have worked for someone else since Microsoft couldn’t be started at the mature level it has today.

Nonsense, but this is the kind of misdirected thinking that is shaping policy. This assumes that Microsoft was not the result of many firms trying to compete to make the best operating system, but that somehow someone would identify Gates as the “right one” and every other entrepreneur should go to work for someone else. I guess government is supposed to do this (like with solar panels), making sure that once Gates is picked, he gets enough taxpayer money to open at “maturity” size.

More fundamentally, the author does not understand the main driver of job growth, and confuses our current problem of weak demand (not all the barber chairs are filled) with the factors that cause job growth (population growth), the need for more barber shops and the jobs this creates.

An economy with no population growth has no job growth in the long run (business cycles like our current situation can create lower employment temporarily). More people need more barber shops, clinics and all those small firms the author berates. Yes, those firms don’t grow big very often, but it is the proliferation of these firms that accounts for the fact that over the past 20 years, 2/3ds of the net new jobs are created by small firms. Sure, more manufactured goods are needed too, but those are produced with fewer and fewer workers over time (productivity) and are not big job generators.

So here are the facts about small businesses:

• 99.7% of all employers are small (under 500 employees)
• 90% have fewer than 20 employees
• produce 65% of the new jobs in the last 17 years
• produce more than half of private GDP
• make up 97.5% of identified exporters
• produce 13 times more patents per employee than large patenting firms
Source: SBA

The author snipes “So much for being seedbeds of innovation.” Yet small business is the R&D for the economy, where new ideas, products, processes are tested in the market. Good ideas are rewarded with profits, the others “re-price” their assets and try again. So what if “many go bust”? These are trials, looking for the best managers and ideas, letting markets (consumers) pick the winners, not the government.

In a growing U.S. economy 500,000 businesses terminate each year, but 600,000 new ones are started, and lots of people are employed and gain experience and training in the process. That’s where the greatness of our economy comes from.

And a P.S., small firms don’t need tax incentives to hirethey need customers. So get it together in Washington and restore consumer confidence, 131 million workers spending more is a great stimulus and reason to hire which will solve the unemployment problem.

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