Do small businesses create jobs?

October 9, 2012 at 10:00 am

Last week an article on Bloomberg took on the claim that small businesses are job creators. According tot he article, the role of small businesses as engines of job growth is way overstated, making three points to dispute this claim:

First, small businesses destroy almost as many jobs as they create. Second, only about 3 percent of small-business owners fall into the upper-income tax brackets that would increase if, as Obama has proposed, the Bush tax cuts are allowed to expire. And third, many businesses counted as small aren’t engaged in traditional small-business activity. Instead, they are partners in hedge funds, law firms and private-equity shops, or they are highly paid actors, athletes, speakers and authors.

Part of this argument pointed rightly to the issue we also blogged about last week: the broad definition of ‘small  business.’ Using ‘pass through entities’ such as sole proprietorships, partnerships, limited liability companies and S corporations, many small business owners report their business profits as personal income in order to avoid paying corporate taxes. Many of these small businesses are very wealthy individuals– as mentioned in our previous blog, Donald Trump’s personal income made through books or speaking engagements would be reported as small  business income in this manner. Bloomberg claims that these very wealthy pass-through entities are the ones that generate the most income, but do not engage in “business activity as it is traditionally understood” and that they are not job creators.

However, the rest of Bloomberg’s claims are more tenuous. Forbes issued an article yesterday taking on each of Bloomberg’s points. The Bloomberg article claimed that “… research shows that small companies play no greater role in job creation than large ones do… New businesses account for the biggest share of job gains.” In response, the Forbes article stated, “Indeed they do, and show me a new firm that starts off ‘big.’” Forbes points out that job growth will follow demand– using the example of a barber shop, as more people need haircuts, more barbers will be needed, and barber shops will need to hire barbers.

Thus, the job growth comes from more of the same stuff for the most part, more barber shops, restaurants, retail shops, etc. As the population shifts, some barber shops close down, new ones open where population growth supports them. But it is the proliferation of these “boring” small firms that provides most of the new jobs, growing where there is demand for their services.

And Forbes also highlights something more fundamental about the value of small businesses– they are incubators for experimentation, where workers can get all sorts of experience and test out new products, innovate, and sometimes lead to the next big thing.

… the small-business sector is the primordial stew of progress, the R&D of the economy where everything is tried out, success is rewarded with sales and profits which support growth. Failures re-price their assets (human and physical) and try other experiments but the whole process supports tens of millions of workers who gain experience and incomes. And every once in a while, Walmart, Miscrosoft, McDonalds, result. But smaller firms with fewer than 500 employees employ half the private workforce. Do the Editors [of Bloomberg] think that the founder of Walmart or Microsoft were the only entrepreneurs trying to build a business? Many others failed. More importantly, tens of millions of workers have jobs and get training and experience in the process of sorting out the winners every year.

The Forbes article concludes, however, with the same refrain that in order to encourage small business, we need to get rid of “useless” regulations and stop the government from “meddling.” We also blogged about  this, and as it turns out regulation is not what small businesses are concerned with. They’re mostly concerned with what Forbes itself identified– demand. Once consumers have the confidence and financial security to spend, demand for goods and services will increase and fuel business and job growth.

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Entry filed under: Economic Development, Economy, Jobs & Employment, Small Business. Tags: , , , .

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