As If Politicians Needed Another Reason To Kiss Up To Big Business…

A new report says small businesses don’t create jobs, large ones do.

Whether from candidates of every political stripe, every president from Ronald Reagan to Barack Obama, or your average talk show host, the prescription for economic recovery has been this: Small business, small business, small business.

So a paper from the National Bureau of Economic Research, written by economist John Haltiwanger and others, throwing cold water on this national assumption, is raising plenty of eyebrows around Washington.

Read the entire paper here, though it is rather thick. The primary theme: Small businesses as a whole don’t create an extraordinary amount of jobs. In fact, they’re responsible for destroying quite a few.

Young businesses do create jobs. It’s a subtle but important distinction. Even so, large firms are more reliable when it comes to job-creation

27 comments

  1. polisavvy says:

    If this is in fact true, I think we all know that larger businesses have and have had more revenues to hire employees and the revenues needed to provide benefits to their employees than smaller businesses. That’s just common sense. I couldn’t pull up the whole article (archaic computer) so I couldn’t read how these people came to the conclusion that small businesses actually are “responsible for destroying quite a few” jobs. Could you please explain their findings to me? Thanks.

  2. MSBassSinger says:

    That report certainly fits with the Rockefeller Republican view of things. Of course, the link has this message:
    “Online access to NBER Working Papers denied, you have no subscription”

    James Poterba, the person in question for this paper, was on Bush43’s tax 2005 reform panel. I don’t recall they did much. He has spent his career in academia – no real world experience.

    From the Small Business Administration:
    Small firms:
    • Represent 99.7 percent of all employer firms.
    • Employ just over half of all private sector employees.
    • Pay 44 percent of total U.S. private payroll.
    • Have generated 64 percent of net new jobs over the past 15 years.
    • Create more than half of the nonfarm private gross domestic product (GDP).
    • Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
    • Are 52 percent home-based and 2 percent franchises.
    • Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.
    • Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.
    (http://www.sba.gov/advo/stats/sbfaq.pdf)

    It also says “Firms with fewer than 500 employees accounted for 64 percent (or 14.5 million) of the 22.5 million net new jobs (gains minus losses) between 1993 and the third quarter of 2008”.

    How did small business get those employees without having created more jobs?

  3. John Konop says:

    If a small business sells to a large business and lays –off 50% of the workers that is a net gain of workers for the large business and a net loss for the workers.

      • At the same time I read recently that the “small business revolution” of the last 40 years is actually largely an outsourcing and specialization revolution. Jobs moved from in house departments at large companies to small businesses and franchises that specialized in those things.

        So, no need for 10 companies in a small town to each have their own in house copy shop employing a total of 40 people when Kinkos can open up and do the same work better with 20. That’s maybe not the best example but essentially what the thing I was reading was arguing (can’t remember where I read it maybe HBR).

        Similarly why should 10 firms employ 20 part time janitors between them when 1 janitorial services firm may be able to get the job done as a contractor with 8 full time employees who are better since they do it full time and ultimately cheaper to employ since they can share equipment.

        Not saying this transfer from large companies with multiple departments to small companies that specialize is a good or a bad thing – probably good overall. But possibly throws some water on the notion that small business is “creating” the jobs as opposed to just being the beneficiary of the transfer from big business, in a sense you could even argue in the examples above that they led to a reduction in jobs (in a specific sector sure but maybe those former print shoppers and part time janitors were just reassigned to a core business function within their firm).

        Interesting that so many are home based. We used to hear about how many millions of people made their living selling stuff on eBay out of their home, I wonder how many of these people are still listing their wares on eBay but spending more time making tea party signs than shipping orders these days?

        • John Konop says:

          They are different types of small businesses. A venture deal usually exploits a niche market or new product with the idea of selling in 3 to 5 years to a bigger player who can scale it. If this group stops feeding the system it has a major impact to the system.

          Another type of small business is a small servicer of businesses and or consumers ie plumber, electrician, hairdresser……They tend not to be as easy to roll-up via size……

          The problem is looking at both as the same in a study. A strong economy needs a balance of the three to stay healthy. Very large corporations are not usually good at innovating by good at scaling. Small servicing business helps small and large business focus on core competency.

          The problem with many studies is they are funded by someone with a paid agenda not real research.

  4. Rick Day says:

    JohnK: here here, with your last comment.

    Here is the problem folks; the old eggs in one basket analogy.

    500 well established small businesses with 10 employees, versus one well established business with 5000. Who is more likely to shut down or lay off 500 workers during down cycle times?

    Small and lean businesses like ours are the furry mammals of the dinosaur age; somehow, our demur livelihood allows us to survive cycles of extinctions. We (not literally) feast on the dead flesh of our bigger competition (pick up great deals at auctions nom nom!). In our case, we are doing what no one else is during this cycle (growing, expanding, hiring), because..well.. hell, it can’t get any worse!

    We can change course faster than most, and that is an advantage in the general business world. Too big to fail? Ask Enron.

    • Goldwater Conservative says:

      Statistically speaking, Of 500 of those small businesses employing 10 people nearly 50 of them will go out of business entirely and their 10 employees will be unemployed. So, 500 people will probably be let go from the small business side as a matter of volume in the market.

      Also, you are mixing aggregate and individual level data when you take a population of small businesses and a single big business. This is commonly referred to as the ecological fallacy and it is frequency stumbled upon by people that do not care to arrive at some objective truth and would rather spread their prejudices.

      Also, plenty of people are investing in their companies right now. Not necessarily in human capital, but they are upgrading technologies and several other things. As Warren Buffet has so famously stated (which has become a maxim at any decent business school): “When people get greedy, I get nervous. When people get nervous, I get greedy.”

      • Goldwater Conservative says:

        Wait, you said “well-established” businesses. That introduces selection bias and does not allow for like comparisons given that, behaviorally, there are vast ideological differences.

        Many small business owners care about their few employees well being on a personal level and will wait as long as possible before down-sizing and may even help place his/her employees in other jobs before going out of business. In short, small business people feel a sense of obligation to their employees. Probably because it is easier to make the causal link between their work and your businesses success.

        Big business has one obligation: profits to investors. When you limit the field of potential observations to “well-established” businesses you remove the level playing field we all look for in established baseline comparisons.

        Which business makes more money, small or big? Big business, obviously. that makes them more important. They are wealthier.

        That is not a fair statement either…it is a simple bit of probably ineffective rhetoric. It is true though. Big business attracts nearly all investment and makes most of the money in the economy, but it is also a somewhat irrelevant piece of information. That is what happens, though, when people abandon science in favor of their beliefs. Beliefs simply promulgate prejudice and emotional attachments and the expense of your enlightenment. Truth and knowledge can not be obtained through belief or faith, but only can they be reached by empirical inquiry.

        • John Konop says:

          Goldwater,

          In all due respect a small business set up on a 3 to 5 years and out plan invest the majority of money back into the business. The reason being is that it drives the value and the pay day is taxed at a capital gain when you sell. Most of the companies have way more than just 10 employees and hire at a very fast rate.

          And when the company sells the management just does it again. And this cycle fuels the job growth in our economy. It helps a large business with ideas they cannot foster and small service companies that feed off the growth.

          The reason we have a problem is debt capital requirements make it hard for a business on this type of plan to grow. And the equity partners smell blood and want too much of the deal.

          Banks are not lending to even profitable business at reasonable debt to equity ratio. This is because they are using new loans to balance out the bad loans with very poor ratios. Until the bad stuff is flushed out of the system which will take awhile the economy will not grow much.

          The focus should be on creating more products that sell internally or exporting to balance our trade deficit. And the fastest road is energy saving products. .

          • BoogDoc7 says:

            Trade deficit is a bad argument, as is “green” technologies. They’re both union and protectionism-centric arguments that aren’t necessarily good economically for America.

            America isn’t a place where we should make a lot of cheap consumer goods anymore. It’s too expensive. Let the third world and developing economies handle that while we work on newer technology.

            I’m not against the “energy saving” – I read “green” products, it’s just that there has been little that has proven to be profitable, and so far much of their manufacture isn’t necessarily as “green” as they are made out to be (see the way the Prius is made here).

            • John Konop says:

              BoogDoc7,

              Help us understand how an economy grows by consuming way more than it produces? Why do you think the father of free economics is wrong (Adam Smith) in his book “Wealth of Nations” that labor must have the same legal rights as the employer unlike places like China….. ? Why do you think Henry Ford is wrong that workers need to make enough money to consume the products they produce unlike places like China……?Would you rather live in a country like China, Mexico….that the spread between rich and poor is widening?

                • John Konop says:

                  analogkid,

                  That is because American workers are competing with workers with no real legal rights as Adam Smith warned. You might find the below article interesting.

                  Illegal Immigration: A Rich American’s Game

                  …..There’s a popular game in America that goes, I’ll cut your wages, but you don’t cut mine. And the outsourcing of your factory job to China is a good thing, because it makes my paycheck go further at Wal-Mart. We hear this theme a lot in the debate over illegal immigration.

                  Consider the recent raids on Swift meat-processing plants. Federal agents arrested 1,187 illegal immigrants at facilities in six states. Mere hours later, economists warned that depriving the industry of illegal labor could raise hamburger prices.
                  Illegal immigration is usually presented as a win-win situation: Undocumented foreigners earn far more than they could back home. Consumers get a bargain.

                  Nowhere to be seen are America’s working poor who get stomped on 13 different ways. They have to compete with illegal immigrants for jobs and housing. Low-skilled natives and legal immigrants also end up subsidizing the undocumented because they tend to live in the same communities, which must provide hospitals, police, schools and garbage pickup…..

                  ….. No vocation keeps a tighter lid on immigration than the medical profession. “If we let in 100,000 immigrant doctors,” Richard Freeman, another Harvard economist, recently told a group of journalists, “everyone in this room would benefit.” Except the American doctors.

                  Suggest a U.S. labor policy that depresses professional pay as a means of keeping prices in check, and you get laughed out of the room. But say that sitting on the wages of unskilled factory workers stems inflationary pressure — a frequently made argument — and the PhDs quietly nod in agreement.

                  And that’s how the game is played. High pay for me. Low pay for you. The folks at the economic bottom are obviously not making the rules…..

                  http://www.realclearpolitics.com/articles/2006/12/illigal_immigration_a_rich_ame.html

                  • analogkid says:

                    Interesting article JK. Thanks for posting it. I don’t really have any strong opinions on the causality of the widening gap, but I’d imagine it’s caused by a number of factors, including (but not limited to) what you cite above. As I said, I mainly wanted to point out that China and Mexico are not the only countries with that problem.

                  • BoogDoc7 says:

                    So what’s the solution?

                    I never have – and never will – buy the income gap issue. I don’t really care how much rich people make – that’s a class warfare argument, not an economic one.

                    For America’s working poor, we need to remove some cover – if they can do the jobs that illegal immigrants are doing, then why aren’t they doing them? How many employers would welcome English- speaking workers who would go in at the same wages?

                    • Goldwater Conservative says:

                      It isn’t a class warfare argument for the sake of being a class warfare argument. Just because you do not like something does not mean it no longer remains an empirical reality.

                      Location of the poor and the location of work is always an issue. Low income rental properties are not usually located in rural areas where a good deal of immigrant labor is conducted. How, then, are immigrants living out there…multi-family households are part of that answer. Another part has to do with self-segregation based on race, religion and “culture” that tends to be omnipresent in the United States.

                      Nobody really cares about the language issue. It is only brought up to make conservatives angry and ready to show up at the voting precinct. In regards to labor, there are enough migrant workers that are bilingual enough to translate any instructions to the rest of the work force. After all, we are not talking about complicated work. Another aspect of your question, which I believe is rhetorical…but I offer a response, you mention same wages and the added value of speaking English. For one, most of the poor we are speaking of are not trained to do the work or are not accustomed to doing the work. Furthermore, society in general does not dignify much of the labor migrant workers engage in. Sure, it is necessary to have sh!t cleaned out of chicken coups…but if you are doing such a job for a living you probably are not a person worth being described by a word as long as dignified. Call me an elitist…I am used to it, but I fail to see how a human being can take pride is shoveling animal waste for a living.

                      Smith was incorrect about several things, which is not entirely his fault…after all, it was the 18th century and statistics was not even really a practice yet…not to mention mathematical modeling was in its infancy and even the form of calculus used back then was seriously flawed (which is also why classical economics does not measure up to reality). Also, The Wealth of Nations is really just a formal model and something of a straw-man argument. That world never has and never will exist so long as people have things other than money to care about (ie religion, politics, rights, possessions, families, etc). All of that being said, that labor must have the same legal rights as the employer was rather spot on…though John’s mention of “like China” ignores the fact that this happens here in the United States to a far greater extent. Speaking of class warfare…is it ethical, moral, right, or even democratic to allow corporate owners to liquidate pension funds of their blue collar workers, pocket the cash and close the business…putting the very people you just robbed of retirement out of a job? No. It happens and we, America, let them do it. Which begs the question, in which direction is the warfare being waged? It should be fairly obvious by now that so called conservatives have only fostered a business and economic environment that has allowed the wealthy to completely dominate the middle class and poor. Not only have we (the wealthy) worked for decades to make the accumulation of wealth a zero-sum game in our favor, but we have made certain that you (the middle and lower class) push for the policies that allow us to do so.

              • BoogDoc7 says:

                What is the answer to increasing production? How can we compete in a world market when we cannot make goods as cheaply? Should we force other countries to sell goods at artificially high prices?

                I believe that you are working from a early-mid 20th century mindset, where mass manufacturing cheap consumer goods in the US was the norm. That world is gone, and we should not seek to bring back something that will bankrupt us even further.

                • John Konop says:

                  BoogDoc7,

                  Basically you think the father of the free market system was wrong about workers needing the same legal rights as employers? And the concept of life liberty and pursuit of happiness is old stuff in your mind?

    • BoogDoc7 says:

      One problem – there are certain things that ONLY big businesses can do well – making cars and large goods, some large-use software (like it or not, we NEED a mass-market, user-friendly standardized OS on our computers).

      • MSBassSinger says:

        I have been running a mass-market, user-friendly, standardized OS for years. It is called “Windows”. I have used Windows from little netbooks to large, high-throughput, high-availability servers.

        When used as designed, it works reliably and is easy to use. And it was developed by a once small company who relied on a large company (Xerox) for the UI concepts.

        That kind of illustrates the interdependence of small companies and large companies previously discussed in this thread.

  5. Goldwater Conservative says:

    I do not see what all the fuss is about. First to address one aspect of research that those of you that are not professional researchers certainly do not understand is the simple fact that we believe assumptions need to be challenged. Reagan and Obama and other presidents, congressmen, etc give this rhetoric on small businesses the way they do because it sounds good and they need to get reelected…not because it is true. Secondly, there are certainly several other academic publications that test alternative hypotheses and come to different conclusions…fact is all of this we still do not know. Third, there is an objective reality and the truth does not change just because a majority of people are stupid enough to use prejudice and emotion to make up their belief as to what is important, effective, and even job creating.

    Next, big business being the driver and engine of the economy makes more sense than small business. Sure, some estimates say that a majority of jobs belong in the realm of small business. That being said. very near 100% of small businesses outsource services that make zero sense in hiring full time staff to do (ie accounting, legal work, IT, etc). Guess what, a good deal of those accounting and law firms and independent IT contracting firms are small businesses, but that does not change the fact that “big businesses” have extraordinarily diverse services provided within and without that small businesses simply do not have the capital nor expertise to provide.

    This is not a holistic view of the situation, I am just trying to paint part of a picture for the rest of you to fill in. Now, big business does not have the same low capital structure that small businesses do. After all, how many small businesses are traded on the NYSE? the London exchange? Hong Kong? 0 if your definition of small business is 49 employees or less.

    As far as small businesses shedding jobs more that big business, that also makes more sense when you find out that 1 in every 10 new small businesses will bankrupt or simply go out of business within its first year of operation.

    Fact is there is some American nostalgia in this conception that small business is the most vital aspect of the economy. This is fundamentally and objectively incorrect. Small business may be more important for the stability and promulgation of our democratic way of life, but democracy and capitalism are also in paradox with one another.

    We can all think of terrible things that have happened because of a few greedy people in big business…maybe the greed and problem is systemic even. Bringing up Enron and Lehman Bros is no way to spread or even arrive at the truth. Rather it is just a campaigning tactic.

    • MSBassSinger says:

      GC,

      Over 1/2 the non-farm GDP is created by small businesses. That seemingly conflicts with your statement that “big business being the driver and engine of the economy makes more sense than small business”.

      I propose that the two are interdependent. Big business cannot survive without small business, and small business cannot survive without big business, although a small business can grow into a large business. My concern is when government is used to give big business an edge over small business. From what I see, that is done at times, whether intentionally or not, through unnecessary regulation.

      • John Konop says:

        MSB,

        I agree but I would add it is more of a manipulation of rules giving big business the advantage. The best example is Sarbanes-Oxley Act which hurt small business which could not afford the requirements and gave big business an advantage which caused the problem in the first place.

        We do need some regulation to protect against fraud and misrepresentations ie food, drugs, banks…..but the rules cannot be in a manner that gives big business the upper hand. And the rules should be more about people be given the proper information to make an informed adult decision. Not rules that attempt to eliminate risk of an adult decision.

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