Government and Small Business

ECONOMIC ANALYSIS: Impact from small biz smaller than we think?

July 31, 2006

The images are out there, reinforced almost every day. Big business is bad, led by overpaid executives who are out of touch and hire lobbyists to get laws changed in their favor. Or, worse yet, they drive smaller companies out of business. Small business, in contrast, is noble, led by energetic people following their dream, facing special challenges and deserving of our support.

Nobody, it seems, is rooting for Wal-Mart to get bigger, and no one ever made a movie about the executives at General Motors and Ford who drove the Tucker automobile to its early demise. And no one has proposed that we form the Large Business Administration to balance the federal government's support in the form of grants and loans to small businesses through its long-tenured Small Business Administration.

That special support is often justified by two simple propositions about small business that have been repeated so often they are rarely questioned. The first one is hard to refute-all businesses start out as small businesses. Yet the image of watering and nurturing a small business like a plant to help it grow does not always square with the realities of the marketplace, where successful small businesses are often gobbled up by larger ones.

But it is a second statement about small business that has always piqued my interest, especially as more data on the dynamics of job creation and destruction become available. Small business, it is said, is responsible for most job growth. Given that small businesses greatly outnumber larger ones-98 percent of establishments have fewer than 100 employees-it is a quite plausible proposition.

Yet the fact that those remaining larger employers account for a hugely disproportionate share of employment-the 2 percent of business establishments with 100 or more employees employ 43 percent of the work force-has always made me feel this oft-stated job-growth proposition is, at best, incomplete. Either small businesses are growing into large businesses quite rapidly, or they are destroying nearly as many jobs as they create.

Now that the Bureau of Labor Statistics has begun to track and compile much better data on job creation and destruction by size of firm, these statements can be put to the test. The answers may surprise, or even frustrate you. Because it turns out to depend on how you keep score.

What is a small business, anyhow? It's hard enough to define the employment threshold that defines "small" when the target isn't moving. Is it five employees? Or 50? Or 100? The larger the number, of course, the more meaningless the description.

But even if we can agree, say, that we're talking about businesses with fewer than five workers, the realities of how businesses constantly expand and contract their payrolls over time make categorization even more difficult.

Do we categorize before or after a job change? One BLS report shows that in a recent period, classifying business as "small" in the beginning yields the conclusion that small business created 900,000 net new jobs in the beginning of this decade. Yet if the classification occurs at the end point, the result is that small business accounts for a 200,000 net job loss.

That kind of sensitivity to simple matters of definition should give us all pause. But the question remains: Which answer to the question of small business and job growth do the experts believe? Using a sophisticated dynamic categorization scheme, and filtering out job changes that are purely seasonal, BLS researchers say it's an almost even split.

About 53 percent of net job growth in the last decade has come from businesses with more than 100 employees. Businesses with fewer than five workers accounted for 10 percent of overall growth.

If you don't like that answer, don't worry. You can easily find another.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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