The Small Business Frenzy

Recently, small business has become the answer to every question. How can we build the economy, create jobs and raise the standard of living? Small business! Why can’t we have paid sick days, family leave, minimum wage, pensions, job safety, environmental standards and fair taxes? Small business!  Indeed, Left or Right, good or bad, no proposal will fly if it can’t be proven to help small business.

Of course, small business is important. No one is going to come to your neighborhood and start a big business to employ thousands, unless it is the ghost of President Roosevelt with a self-financing, clean energy project like the Grand Coulee Dam.  But that would be big government and not allowed. So, can we rely on small business for job creation? There is a lot of fantasy about small business. Let’s consider the facts before we mortgage our future to it.

The Small Business Administration says “small” means under 500 employees. This can be a far cry from mom and pop stores, beauty parlors, restaurants, laundries and boutique clothing stores.  Two things matter regarding job creation and employment:  (1) age and (2) size.  It turns out that older and larger businesses create more new jobs and employ more people.  For example, 46% of all jobs and 37% of all new jobs are in businesses that are over ten years old with more than 500 employees. Compare this to 19% of jobs and 22% of new jobs in businesses under ten years old with fewer than 500 employees.[1]  To look at the extremes, 27% of all U.S. employees work for a business with a payroll of ten thousand people or more, while only 5% work for a business with one to four employees.[2]

Not only do larger businesses employ more people and create more jobs, they pay better. The average hourly worker at a company with 500 or more employees earns nearly twice the total compensation of a counterpart employed at a firm with fewer than 50 workers. That’s $42.39 per hour, in wages, salaries, and benefits, as compared to just $22.96 for the smaller shop.[3]

But what are the trends? Are small businesses the long-term answer to getting and staying out of the economic hole? In noting that the average startup size of a new business is ten employees, a recent study of census data, finds a “potentially troubling trend.” [4]   Since the 1980s there has been a long-term decline in the pace of overall job creation in the United States. This reflects a decline in the rate of business startups which went from as high as 13% (of all businesses) in the 1980s to as low as 7% in recent years. A study of similar data by the Labor Department found that in the 2000s, new businesses started out smaller and stayed smaller. The authors suggest an economic shift in which “new establishments are entering the economy with new modes of production that place a greater emphasis on technology and a lesser emphasis on labor.”[5]  To round out the picture, consider the survival rate of new businesses.  Since 1977 only around 50% of the businesses started in any given year were still going five years later.[6]  Of the businesses started in the year 1992, only 29% lasted ten years.[7] 

Strangely, those who see small business as the economic engine also extol free market competition. They can’t have both. Competition means winners and losers, but unlike baseball, the losers in business don’t come back next season. Companies that are gone, are gone for good. Yes, there should be measures to help small businesses be more competitive, but they mainly compete with each other. While wish them well, let us not commit ourselves to a policy of low wages, low benefits and unstable employment in the belief that it will all improve in the future. For the most part, it won’t. 

It is true that a few small businesses win and become big businesses. It is also true that the economic tendency is for big businesses to become monopolies that shut out competition, but that is another story for another time.

All right then, what can we do?  These pages have often suggested the necessary direction. For example, imagine that Congress declared that in twenty years it would be illegal to burn fossil fuels.  Now imagine public/private partnerships to electrify the country with renewable energy, to remanufacture every car on the road, to change the heating system in every home and office, to reinsulate every building and construct three new high speed transcontinental railroads. That would be the economic equivalent of World War Two, with full employment, good union wages and fair profits for companies of all sizes.  But suppose the private sector won’t play? Well, the truth is that they really aren’t needed any more.  

Steve Max is a DSA Vice-Chair and member of the New York City DSA local. He is a founder of the Midwest Academy Organizing School.