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Are Small Businesses the Biggest Producers of Jobs?

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Letter Writer:

Andrew Smale, master's student in applied economics, University of Minnesota

Date Posted:

May 31, 2011


In the April 2011 issue of The Regional Economist, Mr. Kliesen and Ms. Maués provide insight into the contribution of small businesses to employment in the United States. The article is directed at making the very salient point that we should look at net job creation, not gross, when assessing the dynamics of labor demand by small businesses. Point taken. Unfortunately, the article presents an incomplete picture of the U.S. labor market that leaves the reader with the impression that firms with 500+ employees are the main drivers of employment.

The chart below uses the same (net) data from the BED, which reports annual job gains and losses according to firm size. Using 1992 as a baseline, it is clear why the authors can say that nearly 40 percent of jobs created have been at the largest firms. I would argue, however, that the heady years of the 1990s (a period that included an expansion of technology and free-trade agreements that we have not seen since) do not provide a reasonable baseline from which to derive long-term labor market expectations.

Click to enlarge.

Indeed, the more recent decade provides a marked contrast. When we begin this analysis using the year 2000 as our baseline, a different picture emerges–one where small firms not only create more jobs, but where they create jobs that are more robust to economic downturns. The 2001 recession had its greatest impact on employment at the largest firms, and these barely even rehired their pre-2001 workforce before the Great Recession resulted in even deeper cutbacks. Furthermore, it is intriguing to note the trend in the early 2000s (and today), when smaller firms are increasing employment, while the largest firms continue to hemorrhage jobs.

Click to enlarge.

The Census Bureau also publishes a relevant dataset called the Statistics of U.S. Businesses (SUSB), which contains information on total employment by firm size. For the most recent period available (2008), the SUSB showed that more than 50 percent of American workers were at firms with 500+ employees. This is a troubling statistic if it is indeed the case that these jobs are less secure and slower to be recovered in the event of an economic downturn.

It should not be assumed that the distribution of employment in an advanced economy will naturally be biased toward employment at large firms. This is a consequence of policy, and I fear that the article by Mr. Kliesen and Ms. Maués could be interpreted as a reason to continue the same policies that have resulted in this labor force distortion. Last year, the German minister of finance, Wolfgang Schäuble, noted that, "The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies" (emphasis added). There are many reasons for policymakers to refocus their attention on small and mid-sized firms–and one of them is the fact that these are the progenitors of new employment.