Small Business Job Creation?

In the political debates we continue to hear small business praised as the real job creator—as shown in last night’s encounter. The problem here is how to define “small business.” I will propose a three-fold division—which can then be further collapsed. Small business then means those employing 1 to 99 people, mid-size business as those employing 100 to 999, and big business as employing 1,000 people or more. If we then say that “mid-sized isn’t small, and neither is big business,” then we can derive small and big, big being a combination of mid-sized and the bigger.

I will show here a variant of a graphic I published on LaMarotte back in September of 2010. It shows job creation data for the period 1992 through 2005 from the Bureau of Labor Statistics (link). The series I used has not been updated in the same way since. The graphic here shows net quarterly gains for the period 3Q 1992 through 1Q 2005:

Note here that these are net gains, thus gains when job losses have been reflected. Note also that the two lightly colored bars, for the mid-sized and the big business category, together form the second bar.

In this expansionary period, bigger businesses created more jobs than small business. The following tabulation brings the relevant details:

Average Quarterly Change in Jobs, 3Q 1992 to 1Q 2005
	Firms by Employment Size
	1 to 99	100 or more	100 to 999	1,000 plus
Percent of Total Firms	97.6	2.4	2.2	0.2
Gains (in 000)	4,067	2,599	1,374	1,225
Percent of gains	61.0	39.0	20.6	18.4
Losses (in 000)	3,879	2,381	1,273	1,108
Percent of losses	62.0	38.0	20.3	17.7
Net gains (in 000)	188	218	101	117
Percent of net	46.3	53.7	24.9	28.8

Worth noting here is that small business did create more jobs than the larger categories—but the category also lost more jobs than the others. The large losses wiped out 95 percent of the small business gains—and this was a period of growth. The vast majority of firms is small, to be sure, not quite 99 percent, but close; 2.4 percent of firms produced more jobs than the 97.6 percent. But when it comes to trying to influence the masses, the politicians know whom to praise. 

Employment by Young Firms

The Census Bureau’s Business Dynamics Statistics (BDS) program defines “young firms” as those less than three years old. I want to present some data on such firms today, specifically the total employment they represent. But first some context. One of the things you learn in looking at the world through the lens of statistics is that this lens tends to complete one’s view of economic reality—and frequently to correct misconceptions that arise in political debate. One of these is that small business (and young firms are predominantly small) is the engine of the economy, not least of employment growth. Small businesses do make a positive contribution. They also destroy more jobs than big business does. I made that case a while back here. Today a look at the employment that young firms actually account for, and this state by state.

This graphic appears in a BDS statistical brief accessible here. The highest percentage is achieved by Nevada, about 11 percent of total employment. The lowest percentage, a little over 5 percent, is by the District of Columbia. What surprises me in that case is that it is as high as that. The regional distribution of share here is fascinating in itself. A better look at regionality is provided by the following map:

The source of this map, also BDS, is here. What this map reveals is that political alignments across the nation echo the entrepreneurial activity as viewed through a lens that highlights the employment-growing powers of young firms, however fractional that contribution is to the total.