Small companies have long been lauded as America’s backbone and primary economic pillar. Almost every president in recent memory has campaigned on the necessity of their existence, and the IRS has provided them with tax breaks and tolerance that larger institutions rarely receive.
Recent studies, however, have revealed that small enterprises are not the job creators that they were previously considered to be.
2021 Small Business Spotlight: Read Our Small Business Stories and Learn About the Businesses Nominated Near You
According to the US Small Business Administration, small firms account for more than 66 percent of net new employment creation. According to a new survey, small firms account for 44 percent of total economic activity in the United States.
Although this figure has significantly fallen in recent years, it still accounts for a sizable part of the total GDP contribution.
The decline in GDP share that small firms contribute to while still accounting for the majority of net new job sourcing is particularly significant. According to the USSBA, the small company share of GDP fell from 48 percent to 43.5 percent between 1998 and 2014. During the same time period, however, the amount of small business GDP increased by roughly 25%, at a rate of about 1.4 percent each year.
However, real GDP for major enterprises has expanded faster, at 2.5 percent every year.
So, how does a sector that is becoming less important in terms of overall GDP account for 99.9% of all firms in the United States?
Context is important in economic data, as it is with all data. The figures reported by the SBA are based on data collected up through 2014. According to a 2015 Kauffman Foundation study, new enterprises, not only small ones, contribute for nearly all new employment growth in the United States and nearly 20% of total job creation.
In other words, startups create more jobs than larger corporations. Another study conducted by American Express and Dun & Bradstreet found that mid-size businesses (those with revenues between $10 million and $1 billion) accounted for 92 percent of net new employment creation from 2008 to the end of 2014.
This demonstrates that SBA data and independent studies show disparities in who creates the majority of new jobs.
One cause for this could be the “stickiness” of jobs per business size, or the net vs. gross job generation ratio. While startups and younger enterprises are highly good at creating new employment rapidly, they are also quite good at destroying them.
Another Kauffman Foundation study from 2010 discovered that all net job creation comes from companies that are less than a year old. They go on to say that the problem is that these businesses also kill jobs because many of them fail soon after they open.
According to MIT Press, economist Johnathan Leonard, “small enterprises account for most net employment loss just as surely as they account for most net job gain.” That is to say, the SBA’s figures are not inherently incorrect, but they do not provide the full picture. To summarize: Small businesses create a lot of jobs, but they also kill a lot of them, and no one is paying attention.
Indeed, the SBA discovered in 2012 that just one-third of new enterprises survive to the tenth year. That means that the majority of small enterprises that were job creators in their early days would eventually become layoff machines and “net zero” employers.
So, while it is true that small enterprises contribute significantly to the number of new employment created each year, they may not have as big of an impact on overall job growth.
The United States has traditionally been seen as a desirable destination for startups, providing advantageous tax treatment and perks to those seeking to establish enterprises. Employees are required during their ramp-up — and fast. This promotes rapid job growth, which contributes to overall job growth.
So, why have small enterprises been dubbed the “backbone” of American society?
In the late 1970s, MIT researcher David Birch conducted a study that found that between 1969 and 1975, enterprises with less than 100 employees created more than 80% of all jobs. According to the MIT Press, Birch later conceded that his results were a “silly number” and that he could change them “at whim by adjusting the starting point” or the interval. It didn’t matter because the story of “little is better” had already captivated America.
According to MIT Press, his remark has been “endlessly repeated, like an urban myth, becoming larger and greater, and even being twisted into statements that small businesses are responsible for ALL job generation.”
Years later, small-is-beautiful supporters and presidents on both sides of the aisle are still hammering the concept into the American psyche.”
While this changes people’s perceptions of how much value small firms add to overall GDP, it still doesn’t answer the question of why practically all enterprises are tiny.
Despite not living up to the hoopla around job development, small businesses continue to be an important element of the American economy and way of life. The availability of loans in order to continue your own employment is uncommon outside of the United States, particularly on such a large scale.
While there are clearly arguments against the “debt nation,” the availability of lines of credit allows workers to enjoy benefits that their colleagues in other countries of the same skill would never have.
Wage increase is one aspect of this freedom. According to Business News Daily, “small, locally owned businesses and startups tend to provide higher salaries for people in a community than big, non-local firms, which can actually undermine local economies.”
Another undeniable benefit is the ability to be your own boss. According to the MIT Press, most small business owners have little ambition to develop their companies, and approximately 75% wish to keep their company small.
They go on to say that surveys reveal that the majority of business owners aren’t trying to get rich, but rather don’t want to work for someone else. Furthermore, the same demographic has little desire to expand their labor base, preferring to retain their staff to only a couple of persons. According to MIT Press, this is hardly surprising given that the vast majority of small-business owners are competent artisans, professionals, and small retailers.
Plumbers, electricians, painters, lawyers, dentists, accountants, insurance agents, dry cleaners, petrol stations, and restaurants are among those who form the backbone of the American economy.
While this may not promise well for net job gains, it does provide Americans with the option to practice a way of life that is almost a defining feature of their national identity — freedom.
The ability and ease with which a small firm can be formed is also a significant competitive advantage, if not the American ideal. Nonetheless, it has no effect on the statistical reality.
Given the data on small-company contributions, it would not be shocking if the IRS gradually phased out the preferential tax treatment that business owners have enjoyed for decades.
However, it may be argued that just allowing companies to expand at their leisure is an economically unrealistic goal.
As Goetz points out, encouraging local company rather than attracting huge outside corporations may be a better method for promoting economic growth, according to BND.
“We can’t turn outside the community for economic salvation…the greatest plan is to help individuals start new enterprises and firms locally and help them grow and be successful,” he said.