Small business vs. big business. Which type of business creates more jobs? This is the question policymakers and experts are asking as they look for a way to lower unemployment numbers (stuck at over 7%) and put people back to work. Researchers have different opinions on whether small businesses, startups, or large companies are to thank for creating the most jobs.
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,” which encompasses 99.7% of all businesses that have employees in the U.S. under that umbrella term.
However, a study by entrepreneurship research organization the Kauffman Foundation found that existing firms actually lost around a million more jobs that 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 their business.
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 earlier this month, observing that 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.”
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 and 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, while the speed at which they add new employees has been dropping since 1994. Nevertheless, even with those disheartening numbers, job creation by startup businesses is supposed to continue to outpace existing companies’ rates.
Lastly, 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 – which means that the .03% of companies that are big 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 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. While this idea is questioned, the theory that by bringing down the rate more businesses would be more likely to bring jobs back to the country is sound. If this happens, big businesses will help startups and small business stimulate the economy.
By the way, if you’re hoping to add new employees to your firm, find out how factoring can help your small business cover costs and payroll.