I like small businesses. I like medium size and large ones too. I like 'em all, and while size matters -- small firms face different, and often more challenging, hurdles than large ones -- I fear we risk systemic distortions if our policies are too dependent on firm size.
But aren't small firms the job creators? As I've stressed before, not especially, despite the fact that you hear this mantra hourly from policymakers of both parties. Some new data on private sector employment by firm size from the Bureau of Labor Statistics is especially revealing.
[This is from a new, experimental data series from the BLS, i.e., not yet part of their normal data production -- for now, the data only go through March of 2011.]
The first figure, from the BLS link above, just shows the time series in jobs by firm size, with the three size classes in the new series, 1-49, 50-499, and 500+, so small, medium, and large. Over the full period the average shares for each don't change much: 29% of jobs are at small firms, 27%, medium, and 45% large. There's been a small shift -- a few percentage points -- from medium to large since 1990, but the small shares been roughly constant at 28-29%.
So, the question is, do any of these size classes contribute disproportionately to job growth? In fact, they do, and the winner is... not small firms. Whether it is business cycle expansions or the full run of these data, large firms -- 500+ employees -- contribute disproportionately to job growth. The small firms -- less than 50 workers -- in fact, contribute proportionately less than their share.
That may surprise you if you're used to hearing the opposite, which you hear a lot. There's a reason for the different findings: establishments versus firms.
The BLS data break employment down by firm size, while other sources, like the ADP jobs data -- one of the sources of the big-job-creator claims for small biz -- do so by establishment size. That's not wrong, per se, but when we think about small businesses, most of us are thinking firms, not establishments.
Here's the BLS definition of the difference:
An establishment is defined as an economic unit that produces goods or services, usually at a single physical location, and engaged in one or predominantly one activity. A firm is a legal business, either corporate or otherwise, and may consist of one establishment, a few establishments, or even a very large number of establishments. [my bold]
In other words, establishments can be units of large firms, but a firm under 50 is truly a stand-alone small business. A GAP outlet with 40 employees is counted in the 1-49 size class in the ADP data -- it's a small establishment. But since GAP is a very large firm, in the BLS data, that 40 person outlet is assigned to the 500+ group.
To be clear, I'm not saying ADP and other surveys that base size of establishment as opposed to firm size are wrong. But I don't think the GAP, or Apple, or CVS, or UPS are "small businesses" even though they all have some small establishments that get counted that way in ADP-like surveys (ADP, btw, is very forthright about this point -- see note at end).
So what kind of difference does it make? Huge.
The figure below shows job growth, in thousands of jobs, by firm size (BLS data) and establishment size (ADP) over the 2000s expansion (Nov01-Dec07). They tell a totally different story. While the totals are about identical at around six million, the establishment data would lead you to believe that 80% of the job growth came from small businesses (1-49), but when you actually look at small firms -- so you're excluding the smaller outlets of the large firms -- you see they punched at just below their weight: they created 26% of the jobs; they account for 28% of total employment over this period.
Large establishments were actually a negative over this period, according to the ADP, but large firms accounted for the greatest share of job growth in the 2000s expansion.
If you do the same exercise for the most recent period of job growth, beginning in February 2010 through March 2011 (which is when these BLS data end for now), you get a similar result. Small establishments created 44% of the jobs over these months; large ones only 5%. But small firms created only 17% of the jobs; large firms, 56%.
This morning I got coffee from Saint Elmo's Coffee House, a great small firm in my 'hood. I then went next door to a UPS outlet, where one employee was at work. But that doesn't make UPS a "small business." More germane, when small businesses are asking for special policy treatment, let's be clear that it's the small firms we typically think we're talking about here, not the small establishments. And those firms are not disproportionate job creators.
The next figure shows what I mean. For the full period of the BLS data, 1990-2011, it plots employment shares by firm size -- the averages over the period -- against the shares of job gains. As you can see, small firms (1-49) created a smaller share of job than their employment weight and large firms (500+) were the disproportionate job creators.
To reiterate, as I've always stressed in this discussion, small firms face barriers large firms don't -- access to debt and equity markets, limited cash reserves, export barriers, and less of a cushion in hard times. Public policy should help them overcome these barriers. In fact, given that the NFIB -- the hyper-conservative lobbying group -- now appears to be more about the Koch brothers' anti-tax, anti-regulatory agenda than actually helping small firms, groups like the Main Street Alliance are ever more important.
Neither does it make sense to get all wound up about job creation by firm size. It's far less important than the small-biz centric discussion suggests. Small startups that survive and grow have been found to be key contributors to job growth (see second link above), but beyond that, many small firms grow, many large ones shrink (regression to the mean) and at the end of the day, we want to see robust creation of good jobs, regardless of size class.
So the next time someone's crowing about how the lion's share of the job growth is coming from small businesses, ask them if they're talking firms or establishments. If it's "firms" they're wrong. If it's establishments, they're not really talking small businesses.
Note: The ADP is explicit about this firm/establishment difference -- at the bottom of their spreadsheet they write:
All size data included in the ADP National Employment Report is based on size of payroll. In some cases, small and medium-size payrolls belong to businesses employing more workers than indicated by the size grouping.
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
Laurence Shatkin: Create Your Own Job Opening
Second question: when the Obama administration is talking about tax cuts for small businesses, are they talking about businesses or establishments?
Finally, a question to the HP: WHY did this article disappear from the main page in less than a day? I saw it this morning, wanted to read it tonight and it was already gone, whereas THIS is the information we need to be able to understand presidential candidates' job plans (IF they have a plan, that is, so to be more clear: Obama's job plans ...)?
Really? Because money "earned" and put back into the business is not taxable. It is referred to as a "deduction". Where did you study for your CPA? Lower taxes encourage business owners to pull money out of their business. Higher taxes encourage reinvestment. Where did you get your MBA?
Small businesses certainly need a break. State and local authorities especially have damaging license fees and rules that make running a business such a challenge. Big business is using the federal and local government to squeeze out the smaller competition.
Most of the frivolous regulations are a result of business on business attacks through lobbying. You can't just say "government is anti-business" or " regulations and taxes are bad". Succeeding at business is all about cutting costs and eliminating your competition.
The role of government is to even the playing field so all the parts can be balanced and work smoothly. Taxes are a tool for achieving that responsibility. Unfortunately, they have become a weapon of those with money and influence to use on their competition.
Obama already cut taxes for small businesses EIGHTEEN times.
Obamacare contains the biggest HC tax credits for families and small businesses, AND allows them to be part of an exchange pool (2014), which inevitably lowers costs and increases quality.
Conclusion: I can understand that some people are SCARED because this is a new law. But, on the other hand, why don't they simply READ the bill, or read the independent reports that analyze its impact for small businesses ... ? Or why don't YOU inform them, if you job is consulting them ... ?
Finally: Obama turned Bush's -9% GDP into a +6% GDP in less than a year. That perfectly shows that claiming that "Obama has no clue to how business works" is simply absurd (and then we're even not talking about jobs yet).
It violates a very simple law of any law. KEEP IT SIMPLE...................3 Trillion Dollars over budget by the CBO projections through 2014 and it has not been implemented. States are running away from it in huge numbers. Medical cost have already sky rocketed and I can not pick a new Doctor now. Medicare people are locked into whomever they have now and can not switch. Doctors are not taking any new Medicare patients..............What are you talking about?
For example, when you point out that you got coffee at Saint Elmo's Coffee House, you were definitely visiting a small business, but when you went next door to the UPS store, you may or may not have been visiting a small business. Chances are that you WERE visiting a small business, because most of those local outlets like that are franchise owned, meaning that a local person pays a rental fee to the big corporation for the rights to use the name, but they are themselves a small business.
A caveat would be that if a franchise owner has several locations, BLS will aggregate those while ADP most likely wouldn't. Each McDonald's has a separate payroll. But all of Joe the Owners employees are paid under the same Fed ID # across the 20 franchises that he owns.
Do a search and you'll find:
1) "start ups with 500 employees" = 0
2) "average number of employees at start up" = 5.5 jobs per firm
That 5.5 grows over time to 500+, if the business is successful
If you are confused about small and large perhaps that should be mentioned in your eHarmony bio.
The ONLY time a business adds a person is when they need something they do not have. They need another person on the production line or at the checkout counter. They need a machinist or an assembler, a manager or a specialist they currently do not have on staff.
If a business wants to reduce its tax burden, they need to reduce profits (they are taxed on Net Profit, not on Gross Sales). There are only two ways to do that: Reduce Sales (not a good idea) or increase Expenses. Labor costs are Expenses. If the Net Profit is less than $50K, the tax rate is 15%. So, in reality, the argument that taxes reduce hiring is totally bogus. In fact, since hiring reduces taxable profits, higher tax rates and the inclination to avoid taxes should INCREASE hiring.
If I give a business owner a tax break of $50K, he's going to simply pocket that. There is NO incentive to "create a job" with that money. None. It never happens. That $50K amounts to one job, and why would they hire someone they do not need?
Unfortunately both left and right could stand to learn this important concept. As part of the stimulus, cash awards were handed out to green companies. The idea was that handing them money would create jobs and expand green technology. But as you pointed out, money doesn't drive hiring. Instead of handing wind farm and solar companies billions, Obama should have issued a presidential order to require the federal government to buy green energy and products..
It is demand, not capital, that the country is desperately short on.
BLS uses Federal employer ID's. A franchisee will use his or her own unique number and be counted accordingly. The sign on the store might say McDonald's but the name on the paycheck will be the business that owns that store. If Joe Industries owns 50 franchise stores with 2,500 employees he is a one large employer. But the ADP data will show 50 small business' employing that same 2,500 people.
Franchises are a great example of the point made in the article. They are not the exception.
Reagan created 5.6 million new jobs January 1981 through June 2004, vs. only a very sad +200,000 new jobs for Obama from January 2009 through June 2012. Reagan's first term included an entire 16 month recession with unemployment peaking at 10.8% while Obama's first term included only the last 5 months of a recession with unemployment peaking at 10.0%. It's sad the group of Americans suffering most from Obama' lack of job creation and chronic high unemployment are black Americans -- the group suffering the most ... seems to love Obama the most?
The fact is that the *number of people* working for small business FAR exceeds that of larger business.
The fact is that the patent density of small business employees is FAR greater than big business.
The fact is that far, far more wealth is created through small business.
The fact is that if you want more government to spin out of control on inane studies as well as money to further conquer and divide people, then get out of small business' way.
The sooner the better.
Heh.... sounds like someone has a false right wing narrative to defend! Keep trying! But no one believes trickle down works anymore. Well, not anyone credible, anyway.
"There has not been any job growth under Obama since January 2009"
42 months of private sector growth is "not any job growth"? In what fantasy land are you living!?!? Of course there's been jobs lost - PUBLIC jobs in Red States have been chopped by GOP Governors to keep unemployment high, but the fact is, since the stimulus passed the Democratic Congress, we had quite good growth. Since the GOP took over, they've done nothing but pass anti-abortion bills and waste time trying to repeal the job-creating Obamacare.
Oh, and you should learn recent history - Obama cut taxes too. But Obama didn't RAISE spending; the GOP started two wars they didn't pay for and passed Medicare Part D (again, unpaid for!) and passed TWO tax cuts while going to two wars. Who was fiscally irresponsible here? Be honest!! Obama didn't start the wars or pass Medicare Part D (all three unpaid for).
Look at the record.
However, though if any of those businesses fail, the only ones Obama will consider helping are the ones that are openly willing to support him politically.
Just look with what happened with the automobile manufacturers? Just look at the green companies like Solyndra. This President is slime and if it weren't for business were would his gov't be without their tax revenue? Well his gov't would be another $3.6 T in debt this year.
And you know what, he's RIGHT! Without society those businesses wouldn't have phone service, or electricity, or access to water, or roads to transport their goods, or a police force protecting both the business AND its workers, or a fire protection service protecting both the business AND its workers, or a military to ensure that they aren't speaking German or Japanese etc....