It is often stated that small business owners are the driving force behind job growth; particularly in developed nations such as the United States: that cooperative economic prosperity is dependent upon the independent-oriented nature of entrepreneurs. As the land of opportunity, what would America be without its free-spirited and always enterprising citizens?
But, would it surprise you to know that this theoretical wisdom, albeit optimistic, is not entirely true?
While it is true that small establishments create more jobs – 67 percent, or 8.1 million, of net new jobs were created by small businesses (with 499 employees or less) since 1995 – and small business employer firms represent 99.7 percent of the American working population, the contribution level of startups however is not more significant nor despairing than large corporations in terms of overall net job growth.
National employment figures released by the Bureau of Labor Statistics highlight that total nonfarm payroll employment rose by 175,000 last month and job growth averaged 189,000 per month over the prior 12 months. Professional and business services also increased in February by 79,000 with 56,000 jobs added on average per month over a 12 month period. As well as, “Employment in food services and drinking places continued to trend up in February (+21,000). Over the prior 12 months, this industry added an average of 27,000 jobs per month.”
Nonetheless, a deeper look into the latest census data (2007) shows that with nearly 28 million firms within the US, 21.7 million (three quarters) are firms with no payroll – meaning most are self-employed, and 16 percent of all jobs created were from establishments with 19 or fewer employees. Although the same 75 percent of self-employed business owners accounting for almost 1 billion in sales (for the same period of census data), because they only make up 3.4 percent of total business receipts “they are not included in most business statistics;” such as the Economic Census which measures the economic scope of American businesses.
Data collected by the U.S. Census Bureau every five years in years
ending in “2” & “7”. 2012 results not released at time of post.
The chart below shows total net job creation-adjusted for “birth” and “death” rates- of all firms from 1995 to 2011 with net job creation rate for both businesses large and small as well as the net rate of job creations for all firms combined. Smoothed out over time the annual net job creation (growth) rate for both large and small businesses averaged only 1.3 percent.
Source: U.S. Department of Commerce, Census Bureau: Business Dynamic Statistics
So as it goes, contrary to popular belief – generally-speaking of course – small businesses are no more the solution than the former conviction that large corporations were the answer to life-long job security.
Keeping with the theme of small businesses and how its fundamental factors impact job creation, several studies have shown that what truly affects job growth depends not on the sector of business the company is in, its size or age, but rather the level of entrepreneurship from the one(s) who own the business.
In a 2011 study Erik Hurst and Ben Pugsley both of the University of Chicago shed light on what the vast majority of small businesses actually do as it relates to entrepreneurship and found that “most individuals who start their small business have little desire or expectation to grow their business beyond having a few employees.”
When surveyed, respondents revealed the current state of most firms:
- Most small business operators (nearly 75 percent) did not desire to grow big nor innovate through “developing a new product or service or even enter new markets.”
- Sixty percent of those surveyed did not add a single employee during the four-year observation period. Ninety percent added fewer than five employees, 97 percent added fewer than 10, and only 6 to 8 percent engaged in innovation activities.
Hurst and Pugsley add that although “much employment is due to new firms, it is not true that most new businesses generate employment growth.” This is attributed to low levels of productivity by most small business establishments. According to their research, the top industries for small businesses include both full and limited service restaurants, physicians and dentists’ offices, construction, auto repair, and legal services. For those with less than 20 employees some of the top industries are: construction, dentists, auto repair, legal, real estate, consultation, and insurance services. In fact, the top 40 industries “comprise two-thirds of all firms with fewer than 20 employees.”
The authors noted that, “Researchers and policy makers often either explicitly or implicitly equate small business owners with “entrepreneurs.” While this association could be tautological, we show the typical small business owner is often very different than the entrepreneur that economic models and policy makers have in mind.”
If this is the case, then what determines an entrepreneur and how should one be measured? The Economist recently answered that question from “Magnus Henrekson and Tino Sanandaji [of the Research Institute of Industrial Economics who] argue that the number of self-made billionaires a country produces provides a much better measure of its entrepreneurial vigour than the number of small businesses.”
Some small business supporters believe business professionals, economists, policymakers, and educators alike need to do more to promote entrepreneurship. But entrepreneurial activity alone does not guarantee job growth; more essential is job expansion within existing businesses. (Bednarzik, 2000) A decline in entrepreneurship across a broad range of sectors in the US including the hi-tech sector, as indicated by the Kauffman Foundation a small business advocacy group, is evidence that even ‘en trend’ sectors is not enough to sustain an entire economy.
Most importantly, as the Economist article suggests: “By sponsoring new ways of doing things entrepreneurs create new organisations that employ thousands of people including people who might otherwise have been self-employed. In other words, they simultaneously boost the economy’s overall productivity and reduce its level of self-employment.” And that, is what’s key to this matter: boosting the economy’s overall productivity.
America has received its wake-up call, but, how many entrepreneurs will be able to answer?