What’s the deal with small businesses?

February 26th, 2012

There seems to be this fetishized view of mom-and-pop small business that I frankly never got (and my mother and father had their own business for my entire life!). One aspect of this fetish is that these small businesses create jobs. This never made sense to me. Small businesses may be able to innovate and grow, but if they start adding a lot of employees, and get successful, they become big businesses. Small businesses that stay small can’t be engines of job creation because if they really added that many jobs, they’d be big! Anyway, it seems the numbers back up what I thought was incontrovertible.

For many years, the accepted wisdom has been that it is in smaller companies. But newly released figures from the Bureau of Labor Statistics challenge that notion.

“The most growth in employment has been in large firms,” said Nathan Clausen, the bureau’s economist in charge of the development of the new statistics, which were released this month after more than two years of development.

The figures cover employment from April 1990 — one month after employment reached a high for that economic cycle — through March 2011, just over a year after employment hit bottom after the 2007-9 recession.

Over that entire period, employment at large companies — defined as those having at least 500 employees — rose 29 percent, while employment at smaller companies rose by less than half as much.

At small companies, defined as those with fewer than 49 employees, the total number of jobs rose by just 10.5 percent over the period. Had the entire private sector grown at that pace, rather than rising by more than 19 percent, as it actually did, there would have been nearly eight million fewer people with jobs last March, and the unemployment rate would have been around 14 percent.

So what does this do to all the stimulus and tax breaks for small businesses? Probably nothing. Most spending decisions are driven by economic ignorance.