What’s Wrong Today
Do Small Businesses Create Jobs? We hear: “Most jobs are created by small businesses.” “Small and medium-sized businesses are responsible for most of the jobs in America. ” “Our tax base depends primarily on companies with fewer than 500 employees, and even more so on firms with 100 or fewer employees.”
We hear these factoids all the time, but are they true, or are they just another set of perceptions/partial truths that we call facts?
There are about 6 million businesses in the US with employees. That seems like a big number, but may surprise you to know that there are ANOTHER 21.7 Million firms that have no payrolls. BTW, they average $45.7million in annual revenues-don’t you wonder what can bring in all that dough without any workers?
Looking at the data for the 6 million firms with workers, by # of workers they employ, shows some surprisingly skewed data that may not be what we or our political class, are thinking.
Here are some facts:
- Businesses with less than 500 employees represent 99.7% of firms in the US
- Only 981 companies have more than 10,000 employees each
The distribution of jobs is widely misunderstood. Although most businesses are small, most employees work in large firms.
- Companies with more than 500 employees are just 3TENTHS of 1% of the total, but they account for 50.6% of employment and nearly 57% of payroll
- About 50% of businesses employ four or fewer workers
- 98% of businesses employ fewer than 100 workers
- Firms with less than 100 workers account for less than 30% of payrolls
Source: Census, Table 2a, all data is for 2008
So, What’s Wrong?
Small businesses are the engine of job growth, right? Let’s start by defining “small”. Firms with more than 100 employees are only 2% of total businesses in the US, while those with less than 100 employees are 98% of total companies. As of 2008, there were 4.1 million firms with 9 employees or less, they employed 13 million people and had sales receipts in excess of $2.6 billion:
|
Firm Size |
# of Firms |
# Employees |
Total Sales |
|
1-4 Employees |
3,070M |
6,000M |
$1,435B |
|
5-9 Employees |
1,060M |
7,000M |
$1,145B |
So, how small is a small business in the US? The average firm with less than 100 employees grosses $7.1million in sales annually. So, when some politico describes a “little 250 employee firm”, these are among the largest employers in the US.
So let’s call a less-than-100 employee firm small. Are they America’s job creators? Sadly, no. These businesses do create jobs, but most jobs are created by larger firms with second place taken by start-up firms that survive
If politicians are speaking about high rates of growth off of a small base of employees, small businesses will always outperform the average sized or larger employer due to starting from a lower base. If we are speaking about growth in employment levels, they will be created by the 2% of firms with more than 100 employees. Growth in employment levels is what matters.
Start-ups are small by definition, but they are a tiny subset of the 6 million businesses. A recent study by NEBR finds that start-ups that survive are particularly important in terms of generating new jobs, while “once we control for firm age there is no systematic relationship between firm size and [job] growth.”
So, summing up, the facts are that small businesses, say those with less than 100 workers, account for a minority of both workers and payrolls, and are not the primary engine of job growth. Running a small business is not without its challenges though, especially where managing an efficient payroll is concerned. Some turn to outsourced app solutions for payroll and workforce management; Deputy is an Australia based workforce mangement platform that is a prominent example of this. Above all, it cannot be denied that software is totally changing the way that companies do business. Thanks to accounting software like FreshBooks for example, balancing the books has never been easier. That being said, there are so many different types of accounting software out there nowadays that it can be difficult to determine which one is best. Comparing freshbooks vs quickbooks can shed some light on the situation though. However, even with these developments in place to streamline processes, challenges still remain. A friend of mine owns a small business and told me just the other day “We might be small, but we do make a difference to our local economy. When it comes to paying our staff, everything needs to be perfect, so we use Cloudpay for our payroll. I hope more people are inspired to start their own businesses over the next few years as there are a lot of opportunities out there.”
Why then why the favoritism in political and policy circles for the little firm?
In part, it’s because they are always a good story. We love to hear about the little guy who makes a bundle through hard work and a good business plan. It is also good politics. It conforms to the agenda that says that if the government would just get out of the way, hundreds of Steve Jobs equivalents would emerge from small companies. None of this is substantiated by data.
The misrepresentations about small business as the agents of growth are a problem in our politics. We all want the small firm to succeed, but clarity needs to be paramount if we are to implement policies that help return us to sustained GDP growth.
Should small be beautiful? Discuss…..
