Tuesday, December 23rd, 2014

The ups and downs of small business employment

Small businesses account for most of the jobs created and most of the jobs lost.
Small businesses account for most of the jobs created and most of the jobs lost.

Several readers contacted us after we recently gave a True rating to U.S. House Majority Leader Eric Cantor’s claim that small businesses "create 70 percent of the jobs in America."

They noted U.S. Census figures that show small businesses employ about 50 percent of the nation’s private-sector workers. And they asked how it is possible for small businesses to create such a large majority of jobs but employ only half the workers.

We'll try to answer that question.

We’ll start by defining a small business as an enterprise with fewer than 500 employees. That’s the definition used by the Small Business Administration.

The Bureau of Labor Statistics compiles data that tracks employment levels for companies with fewer than 500 employees and those with 500 or more. The SBA analyzed those numbers two years ago and found that from 1993 to the middle of 2009, small businesses created about 65 percent of the new private sector jobs in the country.

In the first quarter of 2011, the latest period for which data is available, there were 300,000 net new jobs and 85 percent were created by small businesses, according to BLS data.

But there’s flip side to this coin. Most of the jobs lost also come from small businesses.
"Most small firms start small, stay small, and close just a few years after opening," wrote Brian Headd, an SBA economist, in a 2010 report.

We could not find SBA reports totaling the number or percentage of lost jobs coming from small businesses over a lengthy period of time. So we did some quick computing on our own, using BLS figures from the start of 2009 to May 31, 2011 -- the most recent nine quarters available.

During that span, small businesses created 47.7 million jobs and lost 51.9 million, either through layoffs or closings. Small businesses accounted for almost 79 percent of the private-sector jobs created in the nation and 77 percent of the jobs lost.

BLS data shows that only 49 percent of new businesses last five years or more; 34 percent survive 10 years or more; and 26 percent survive 15 years or more.

According to the SBA, 3.16 million small businesses opened from 2005 through 2009, and 3.08 million closed.

Most of the surviving small businesses "do not grow by any significant margin," according to a 2011 study by University of Chicago economists Erik Hurst and Benjamin Pugsley. "Most firms start small and stay small...," they wrote.

And here’s a piece of irony we found on the SBA web site: Some of the most successful small businesses that keep adding jobs grow into large businesses and move into a different statistical category.

For all these reasons, small business jobs have hovered at about 50 percent of nation’s private-sector employment for more than a decade.