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Small Business or Big Business: Which Really Creates the Most Jobs?

Phil Cohen

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There’s no clear-cut answer as to which type of business creates more jobs. By percentage, small businesses generate the most new hirings. However, big businesses hire well more than their market share. Despite only making up 0.3% of businesses, they hire over 1/3 of workers.

Small business vs. big businesswhich typically creates more jobs?

This is the question policymakers and experts are asking as they look for a way to lower unemployment numbers. Researchers have different opinions on whether small businesses, startups, or large companies are to thank for creating the most jobs.

The Case For Small Business

Dubbed the “backbone of our economy” by President Obama in several speeches, small businesses have been pointed to as having the utmost importance and impact on our recovering economy.

“Small businesses embody the promise of America: that if you have a good idea and are willing to work hard enough, you can succeed in our country,” Obama said when he proclaimed May 15-21 to be National Small Business Week.

According to the U.S. Small Business Administration (SBA) Office of Advocacy, small businesses have generated 64% of net new jobs over the past 15 years. The SBA considers companies with less than 500 employees to be “small businesses”. 99.7% of all businesses that have employees in the U.S. fall under that umbrella term.

However, a study by entrepreneurship research organization the Kauffman Foundation had different findings. They found that existing firms actually lost around 1,000,000 more jobs than they added every year from 1977 to 2005. This is due to the majority of employers being uninterested in growing past a certain point. Research done by the University of Chicago showed that only one in four small business are interested in expanding.

The National Federation of Independent Business’s chief economist Bill Dunkelberg says that adding new jobs isn’t the only way that small companies can create jobs though.

“The jobs problem we face today, in fact, is that employment is below capacity in existing firms,” Dunkelberg wrote. Many of the 8 million workers who lost their jobs during the recession were working for small businesses. “Public policy should focus on what might be done to spur those firms to re-employ workers who had jobs at the peak of the expansion.”

factoring for small businesses

Start-up Companies

While there are many experts who claim small businesses are the ones who create the most jobs, there are also those who point to startups as the most reliable job creators. Research by the National Bureau of Economic Research has revealed that when controlled for the age of the business, there is “no systematic relationship” between the size of a company and job growth. Because of that study and others, startup supporters have urged lawmakers to back proposals that would make the process of starting a new business easier.

However, is that really a good idea? Census statistics discovered that less than half of the jobs created by startups still exist after five years. In fact, the net employment rate falls rapidly as the businesses grow older. The Kauffman study found that the average number of employees at startups has been on the decline since 1998. All-the-while, the speed at which they add new employees has been dropping since 1994. Even with those disheartening numbers, job creation by startup businesses is supposed to continue to outpace existing companies’ rates.

Attracting Qualified Workers

Small businesses are currently facing a multitude of challenges when it comes to attracting qualified workers. Despite an increase in optimism, hiring activity has remained stagnant with a growth rate of only 0.01 per company in December, according to the National Federation of Independent Business (NFIB). The primary obstacle seems to be the historically tight labor market, as stated by NFIB economist Bill Dunkelberg.

One major challenge for small business owners is the limited pool of qualified applicants. The lack of skilled individuals available for hire makes it exceedingly difficult for these businesses to find the right candidates who possess the necessary expertise and experience. This scarcity forces small business owners to compete with larger companies that have greater resources and more attractive compensation packages.

Furthermore, the tight labor market places financial pressure on small business owners. Many of them are hesitant to raise prices on consumers, which restricts their ability to increase wages and compete effectively for qualified applicants. This inability to offer higher compensation packages makes it even harder for small businesses to attract and retain talented individuals, as they may opt for positions in larger organizations that can offer better remuneration.

The current labor market challenges also impact the overall competitiveness of small businesses. With limited access to qualified workers, these businesses may struggle to keep up with larger corporations that have more resources and a broader talent pool to draw from. This lack of competitiveness can hinder business growth, innovation, and their ability to meet customer demands effectively.

Hiring Remains Flat

According to recent data from the National Federation of Independent Business (NFIB), despite an increase in optimism among small businesses, hiring activity has experienced minimal growth in December. In fact, the growth rate of hiring activity per company was reported to be just 0.01, indicating a relatively stagnant state. This suggests that small businesses are still facing challenges in finding qualified workers, which has hindered any significant expansion in their hiring efforts.

Large businesses have also been heralded as those that are creating the most jobs by researchers. Small businesses, which account for 99.7% of all companies, generate less than 2/3 of the U.S.’s new jobs. This means that the largest .3% of companies create one out of every three new jobs, more than pulling their weight.

Over the last twenty years, small and medium-sized companies have accounted for 29% and 27%, respectively, of the U.S.’s overall employment. Yet the total of new jobs added by them has come in at 16% and 19%. During that time, businesses with over 500 workers have employed around 45% of the workforce. And yet, they are accountable for 65% of the new jobs created since 1990.

Some business leaders have suggested that the government should encourage big companies to pull back on outsourcing- something large corporations are prone to do- by decreasing the U.S.’s corporate tax rate. In theory, bringing down the rate would make businesses more likely to bring jobs back to the country. If this happens, big businesses will help startups and small business stimulate the economy.

It really comes down to incentives. A large corporation will make investments in product innovation if they can make more revenue. They will hire when it makes fiscal sense to do so.

Challenges for Big Business

Decline in New Businesses

According to research findings from the Kauffman report, there is evidence suggesting a decline in the rate of new business openings. The authors of the report point out that, based on Census data, the proportion of new companies compared to all U.S. Businesses has been steadily decreasing. In the late 1970s, new companies represented a significantly higher percentage compared to their representation by 2011, which was only 8%.

Moreover, the decline in new business openings is reflected in the dwindling job creation by these firms. The authors of the Kauffman report highlight that between 2005 and 2010, new companies were responsible for creating over 2 million fewer jobs. This decline in job creation by new businesses further supports the notion that the rate of new business openings has been on a decline.

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