The Truth Is That Small Businesses Are Not Good At Creating Jobs

Barack Obama Mitt Romney small businessesNEW YORK (AP) - Mitt Romney says they're "job creators" and vows to come to their aid as president. Newt Gingrich visited them on his "jobs and growth" bus tour. President Barack Obama calls them "the engine of our economy."

If there's one thing Republicans and Democrats agree on, it's that small business is the answer to what ails the economy. On these tiny bundles of entrepreneurial energy, they say, rides the nation's hope for lower unemployment and faster economic growth.

But the work of several economists suggests that most small businesses are not particularly adept at creating jobs, at least not the best jobs. The work also suggests their role in generating national wealth has been exaggerated.

The problem is that not all small businesses are created equal. Businesses just getting off the ground contribute most of the country's job growth, but older small businesses cut as many as they add.

Think Bill Gates and Paul Allen huddled together late nights developing Microsoft, not the corner liquor store.

"I don't want to pick on dry cleaners and restaurants and small manufacturing firms, but they're not a big source of job creation," says John Haltiwanger, an economist at the University of Maryland.

Politicians like to say that small companies create two of every three jobs in a given year. That's less impressive when you consider that almost all the 6 million companies in the U.S. - 99.9 percent of them - are small businesses, with fewer than 500 workers.

What's more, two-out-of-three masks the fact that most small businesses eliminate more jobs than they create in a given year, either through layoffs, closings or bankruptcy.

And many of the rest, the ones that don't shrink or shut down, don't offer much hope for the millions of Americans looking for jobs.

Many small companies - outfits like florists, hardware stores and barbershops - tend to grow with the U.S. population, not faster. So they don't speed the economic recovery the way an exploding new industry might.

According to an August study by two University of Chicago economists, most small business owners just want to be their own boss and never expect to hire more than a few employees.

In fact, the more you study the numbers, the more you wonder what the politicians are getting so excited about. Haltiwanger and two other economists showed, in a study of millions of companies over 30 years, that small businesses no more than five years old - that's about 40 percent of them - are the only ones that create more jobs each year than they cut.

In 2005, for instance, more than 99 percent of the 2.5 million net new private-sector jobs in the United States came from these startups, according to the U.S. Census Bureau.

But the 60 percent of small businesses that have been around more than five years act as a slight drag on the number of jobs available in the United States. They have cut about 0.5 percent more staff than they have added in a typical year, according to Haltiwanger.

By contrast, big businesses, the ones that get all the headlines for layoffs, have hired more than they have cut - about 0.1 percent in a typical year.

Economist Charles Kenny of the New America Foundation, a nonpartisan research group, goes as far as suggesting that Washington should stop offering certain incentives to small business owners, such as loan guarantees and write-offs on taxes for home offices. He says the money would be better spent subsidizing research and development.

"If you want jobs, you have to focus on the innovative firms trying to provide something new and different," he says.

The country's unemployment rate is 8.3 percent, the lowest in three years. But the U.S. still has 5.6 million fewer jobs than before the recession. Assuming the pace of hiring from last year continues, it will take three years to recover all the lost jobs.

Small businesses aren't helping much. They cut more workers than they hired in all but three months last year, and contributed zero to job gains again in January, according to a survey by the National Federal of Independent Business.

To change that record, Republicans say Obama needs to cut federal rules and paperwork that are burdensome for small businesses that don't have human resource departments, legal staff and vast resources like big businesses. To comply with federal regulations on the environment, for instance, companies with fewer than 20 workers spent $4,101 per worker in 2008, or 4½ times more than companies employing 500 or more, according to the Small Business Administration.

The same study showed these businesses spent three times more per worker on tax preparation than did their larger counterparts.

"As regulatory complexity increases, it's hard on small firms," says William Dunkelberg, chief economist at the National Federation of Independent Business, a group closely allied with Republicans. "We need to get government out of the way."

But many economists think the root of the job problem is deeper.

Again, it's the difference between old small businesses and new small ones, and the U.S. is not creating enough of the new ones.

It was true even before the Great Recession: The number of startups less than a year old was no higher in the boom year of 2006 than it was 30 years ago, when the economy was much smaller, according to the Census Bureau. And the ones that are launching are hiring fewer people, too.

The grim takeaway is that the U.S. could struggle with high unemployment long after a pickup in economic growth. Even the idea that small businesses play an outsized role in the economy has come under attack lately.

A study from the left-leaning Center for Economic and Policy Research shows that the self-employed worker, that rugged exemplar of the small businessperson, accounted for less of the working population in the U.S. than in the other 20 rich countries tracked, except for Luxembourg.

Another study by economists at Harvard and Dartmouth suggests that might not be such a bad thing because poorer countries are more likely to have a higher share of their workers self-employed.

Adding fuel to the argument, Kelly Edmiston, an economist at the Federal Reserve Bank of Kansas City, showed that workers at small businesses are more likely to lose their jobs and less likely to have vacation days, retirement plans and a range of other benefits, including health care. Some 41 percent of companies employing less than 100 people offered no medical insurance at all.

So, myths about job creation aside, why isn't the U.S. launching more startups? The risky economy, regulations or health care costs - a bigger burden for small companies - could be scaring them off.

Haltiwanger thinks demographics may be at work. He says businesses are often started by people in their 30s and 40s. So as the population ages and more baby boomers retire, the number of startups falls.

"We're a roll-the-dice economy. It has a lot of spillover effects," he says. "But we're not experimenting enough."

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Really?? No kidding. Keep introducing new regs and watch the trend continue. My solution to the new health care bill? I simply wont hire.

Rediculous "lead safe" regulations for a problem thats down 95% in the last 25 years and thus going away on its own. And only effects 2% and less of the population. But really seems ot me to be a way for the government to extort $400 from every home improvment contractor in the country. and raises my costs by 30% which the homeowners seem unwilling ot absorb. And thats not including the cost of training every employee to the tune of about $2-300 a head
I'll just forgo your $400 fee and simply not do work on those homes. Thus I dont have to worry about those jobs or having enough people to do them.
Not o mention all the other doodads the Goverment wants to get involved with my business.
The US government is the single largest reason I do not see myself doing any new hires in the forseeable future.
you want me and other businesses to do more hiring? Get out of our lives and our businesses

February 18 2012 at 5:46 PM Report abuse +1 rate up rate down Reply

I was just reading this article and a related article on government grants... seriously, the government needs to redefine what a small business is. In the grant article it specified that eligibility STARTS at 100+ employees with $6 MILLION a year gross income. On what planet is that a small business. The suggestions provided by the experts in the article illustrate some of what needs to be done (i.e., reduction of paperwork etc.) perhaps with lower granting requirements these establishments could flourish and hire more.

February 18 2012 at 5:05 PM Report abuse rate up rate down Reply
1 reply to davidl0830's comment

I totally agree with your comments. I have owned a small business for 33 years. We have between 25-25 employess, we do well. We, have many long term employees - over 10 years...a few over 20 years. But no way do we qualify for the gov't's definition of a small business!! Also the paperwork just in dealing with local, state and federal regs is unbelievable!!! There are days I just want to close down and say "F" IT!!"

February 18 2012 at 5:48 PM Report abuse rate up rate down Reply
1 reply to DenaliMan's comment

I have been involved in a very similar, established business (it's been here for 40 years). We have a very slow turnover rate with employees and it's a shame we don't qualify for government funds (outside of a loan) to expand or update. We pay taxes and fees through the nose whereas giant corporations like GE pay zip. If small business is to be the savior of the American economy, the government must restructure it's definition of what a small business is to actually include companies like ours.

February 18 2012 at 6:18 PM Report abuse rate up rate down

"But the work of several economists suggests that most small businesses are not particularly adept at creating jobs, at least not the best jobs"

How manipulative and double talking the Media is. The bolg was headlined:" The Truth Is That Small Businesses Are Not Good At Creating Jobs" That implies any jobs. But inside there is :"But the work of several economists suggests that most small businesses are not particularly adept at creating jobs, at least not the best jobs". "At least not the best jobs" suggest that whoever wrote this drivel realises that most people read the headlines and may believe the lie.
"Automatic Data Processing (ADP), which uses payroll data to track U.S. employment. ADP's data shows that the share of U.S. employment in businesses with less than 500 employees is ..In 2006, the ADP data showed that 82.9% of U.S. employment was in businesses with less than 500 employees."
That Media intentional misinformation is a one of the steps of the forced conversion to socialism, not unlike the Laos Death March . The need for Government to control every aspect of people's lifes, in order to keep them compliant and in check, is to take the last niche of independance-private business. The Communists did it in Eastern Europe and their masters are here now. The result there was a total catastrophy, in order to enslave us they will do it here too.

February 18 2012 at 3:52 PM Report abuse rate up rate down Reply

Primary/Export Jobs create "Hard Currency" products such as food produce, manufactured goods
and commodities like fuel, raw materials, etc.

Seconary Jobs only trade and exchange the Hard Currency Money created by Primary Jobs.
Examples of Secondary Jobs are Services, Finance, Government, Tourism, etc.

There are exceptions such as Knowledge Services, etc, but they are minor.

Old Rule appies, "Wealth is created by Mining, Manufacturing and Agriculture".

Every Primary Job creates an estimated 1-2 Seconary Jobs (Multiplier Effect).

Wish Media would understand would help alot !

February 18 2012 at 3:51 PM Report abuse rate up rate down Reply

Here's an idea. Stop taxing small business owners to death, and maybe we would be able to AFFORD to hire more people.

February 18 2012 at 3:43 PM Report abuse rate up rate down Reply

From my point of view--35 years in a CPA firm which grwe from two dozen people to over 200 when I retired at age 60---at that time 4,000 clients among a dozen offices in four states--, then the last 15 years as a consultant,board menber and minority owner of a busness which 15 tears ago had about 125 people and now has 200. I can come to the same conclusions by carefully including every so called small business that never was formed to grow--barber shops,Amy types,part time real or insurance agincies etc. There is an old sating that figures don"t lie but liers figuer. Smal; business do not take the expansion risks when faced with tax and over regulation uncertainy==Small business people are willing to risk when the risk,in their minds are assessable-but wncertain government is not assessable

February 18 2012 at 3:25 PM Report abuse rate up rate down Reply
1 reply to jmfisher401's comment

Sure hope your math was better than your typing. If not, bet some poor soul has tax problems. And people who lie are called "liars".

February 18 2012 at 5:10 PM Report abuse rate up rate down Reply

Are these economist liberals or occupiers, probable both!

February 18 2012 at 3:23 PM Report abuse rate up rate down Reply
Our Staff

Mr. President it is not that small business cannot or are not good at creating jobs it is that they are last on the list to secure support and funding. Mr. President maybe if you would revisit all the letters I have sent to you you would then support the thousands of jobs khwikball operations will provide over the next three years? And while you are at it ask your wife to participate with khwikball in her "Let's Move" program (failing) and also help fight obesity through the overwhelming fun the youths and teens receive through play? It only takes a small effort and an hour of your time to begin the process. You both simply dismiss and ignore at will and the opportunities and health benefits pass. Those in the positions to do something don't and is a huge factor in why small business doesn't create jobs. Also inventment into companies going bankrupt (SOLYNDRA) Mr. President? Scott Cloran, Sr. KHWIKBALL INVENTOR-AMERICAN

February 18 2012 at 2:54 PM Report abuse +1 rate up rate down Reply

They should do a poll of the small business owners and ask if the ObamaCare factor affected their hiring plans. EVERY small business I've talked to said it has had a Major effect on their plans.

February 18 2012 at 2:46 PM Report abuse +3 rate up rate down Reply
2 replies to oneman689's comment

if my business has to pay for employee health car, I will be forced to lay off. It is hard to stay in business when you are forced to lower cost to compete. I have a construction co. that has domestic employees making a livable wage. The migrant work force are willing to do the same work at 1/3 less on average. At this stage of the economy, many people are choosing cost over quality.

February 18 2012 at 3:43 PM Report abuse -1 rate up rate down Reply
1 reply to swiz6's comment

I am a contractor as well. And I concur completely.
Far as migrant workers. Maybe not quite a 3rd but close enough. And they want it "off the books"
Then as I mentioned in another post. are these absurd leadsafe regulations which were obviously written by people who have never in their lives actually done the work they are trying to regulate. I am still waiting for someone to explain to me how your supposed to "recover the water" used to powerwash a house. Let alone dispose of it as toxic waste.

February 18 2012 at 6:02 PM Report abuse rate up rate down

As I already mentioned. My solution to Obama care is simple. I just wont hire.

I dont need a healthcare bill. I dont need a government grant or loan. What I do need. more then anything else. Is the government out of trying to regulate and tell me exactly how to run my business.
Its getting to the point where unless you are a mega corperationt o begin with. It is nearly impossible to run a business successfuly and still do it legally.

February 18 2012 at 5:57 PM Report abuse rate up rate down Reply

Another statistic overlooked, almost 50% of the US workforce are employed by small businesses, and these are folks who are not going to make a large salary, but at least they are working. And the economists you quote are mid to extreme leftists, shows again who the press is for.

February 18 2012 at 2:40 PM Report abuse +3 rate up rate down Reply
1 reply to rockythp's comment

Depending on the business or trade. You can make a pretty decent living working for a small business. but the largest hinderence of wages and simply doing business in general in small businesses is none other then the US government.

February 18 2012 at 6:05 PM Report abuse rate up rate down Reply

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