Small businesses are job creators; they are also job destroyers, as firms fail. Most start-ups do: About 40 percent of jobs created by start-ups are eliminated in the first five years. Meanwhile, established small businesses -- your neighborhood dry cleaners -- don't generate many new jobs.
The chief source of small-business job creation comes from a mere handful of firms -- the "gazelles," in the evocative term of economist David Birch -- that start small and prosper. The difficulty is that the gazelles among the herd can been seen only in the rearview mirror.
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This conventional wisdom about small business was once revolutionary. About 30 years ago, Birch reported that small businesses were responsible for two-thirds to four-fifths of net new jobs (jobs created minus jobs lost).
Subsequent studies have supported his basic proposition: Small business plays an important, and previously overlooked, role in job creation. But the research suggests that Birch's numbers are overstated -- and that size isn't all that counts.
A 2008 paper by David Neumark, Brandon Wall and Junfu Zhang examining all businesses in California from 1992 to 2004 concludes, "Although we still find that small establishments create more jobs, the difference is much smaller than that originally suggested by Birch."
Likewise, a study that Acs conducted for the SBA found that "most, if not all, of the growth in employment comes from the 300,000 high-impact firms in the economy over any four-year period. Depending on the time period studied, this is about evenly split between firms with fewer than 500 employees (the SBA definition of small business) and firms with more than 500 employees. Therefore, it would appear that both small and large firms contribute about equally to employment growth."
A new paper by economists John C. Haltiwanger, Ron S. Jarmin and Javier Miranda adds another wrinkle to the data: the age of the business. In terms of job creation, younger is better. "Once we control for firm age there is no systematic relationship between firm size and growth," they write. "Our findings highlight the important role of business startups and young businesses in U.S. job creation."
Small business matters -- just not as much as and in more nuanced ways than politicians proclaim. Indeed, one key difference between this recession and its predecessors is that small business has been hit harder than normal, perhaps because the downturn was driven by turmoil in the financial markets.
Where a typical recession tends to wallop big businesses harder than small ones, this time around "young, small businesses have taken it on the chin more than usual," says Haltiwanger.
Read the entire article, "The little engine that can't: The myth about small businesses and jobs" by Ruth Marcus at the Washington Post online.
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Though there is debate over the net effect of small business creation on the employment rate, there is little debate over the importance of small business development to the economic recovery. Small businesses can be started with greater speed and require less starting capital than do larger businesses. Further, the recession tended to weed-out weak businesses, creating opportunities for new business startups. The quality and longevity of the newly created jobs, though, is largely dependent on the forethought and planning that preceded the small business start. For the region to reap long-term benefits from small business development, there is a need for research, planning, and strategic promotional efforts.
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