Small businesses aren’t key to job creation---the data is out of context

Small businesses have long been touted as America’s backbone and the main pillar of its economy. Almost every president in recent memory has campaigned on the importance of their survival, and the IRS has allowed them tax allowances and leeway that larger institutions are rarely afforded. However, recent studies have shown that small businesses are not the job generators they might have thought to have once been. According to the U.S. Small Business Administration, small businesses create over 66% of net new jobs. A new report also shows that small businesses account for 44% of total U.S. economic activity. Although this number has declined gradually in recent years, it still remains a significant portion of overall GDP contribution. The drop in GDP share small businesses contribute to while maintaining the majority of net new job sourcing is of particular importance. According to the USSBA, from 1998 to 2014, the small business share of GDP has fallen from 48% to 43.5%. Yet, over the same period, the amount of small business GDP has grown about 25%, at a rate of about 1.4% annually. They add that real GDP for large businesses has grown faster however, at 2.5% annually. So how does a sector that has decreasing importance on total GDP still account for 99.9% of all businesses in the United States? As with all economic data, context is key. The numbers cited by the SBA are from numbers accumulated up until 2014. A 2015 study by the Kauffman Foundation found that new businesses, not necessarily just small ones, account for virtually all new job creation in the United States and nearly 20% of gross job creation. In other words, startups spur greater job growth than larger companies. Another study by American Express and Dun & Bradstreet showed that mid-size firms (those with revenue between $10 million and $1 billion) were responsible for 92% of the net new job creation from 2008 through the end of 2014. This shows that SBA numbers and independent studies demonstrate conflicting figures as to who generates the majority of new jobs. One of the reasons behind this could be the “stickiness” of jobs per firm size, or the net vs. gross job creation. While startups and younger firms are very efficient at creating new jobs and quickly, they are also just as efficient at destroying them. Another Kauffman Foundation study in 2010 found that all net job growth comes from firms less than one year old. They add that the problem is that these firms also destroy jobs, as many go out of business soon after they open. Economist Johnathan Leonard told MIT Press that the largely ignored pattern is that “small establishments account for most net job loss just as surely as they account for most net job gain.” That’s to say that the SBA’s numbers are not necessarily wrong, but they do not offer the entire context. To sum it up: Small businesses create a lot of jobs, but they also destroy a lot of them too and people aren’t taking notice. In fact, the SBA themselves found in 2012 that just one-third of new businesses survive to their tenth year. That means that the majority of the small businesses that were job-churners in their early days, end up being lay-off machines and “net zero” employers in the end. So while it may be true that small businesses largely contribute to the amount of new jobs each year, overall they might not have as much of an impact on real job growth.