Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Increasing Importance of Summer JobsThese jobs offer an opportunity to learn as well as earn money.

Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.

Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.

Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.

View archives

Top Tags

jobs and employment 231
economics 178
education 149
economic development 146
state and local government 129
taxes 123
finance 109
indiana 106
migration and population change 104
budget and spending 104
Browse all tags
Reporter / Admin Login

July 31, 2006

The Truth About Small Business

The images are out there, reinforced almost every day.  Big business is bad, led by overpaid executives who are out of touch, hiring lobbyists to get laws changed in their favor, or worse yet, driving smaller companies out of business.  Small business, in contrast, is noble, led by energetic people following their dream, facing special challenges and deserving of our support.

Nobody, it seems, is rooting for WalMart to get bigger, and no one ever made a movie about the executives at General Motors and Ford who drove the Tucker automobile to its early demise.  And no one has proposed that we form the Large Business Administration to balance the Federal Government’s long standing support in the form of grants and loans to small businesses through its long-tenured Small Business Administration.

That special support is often justified by two simple propositions about small business that have been repeated so often that they are rarely questioned.  The first one is hard to refute – all businesses start out as small businesses.  Yet the image of watering and nurturing a small business like a plant to help it grow does not always square with the realities of the marketplace, where successful small businesses are often gobbled up by larger ones.

But it is a second statement about small business that has always piqued my interest, especially as more data on the dynamics of job creation and destruction become available.  Small business, it is said, is responsible for most job growth.  Given that small businesses greatly outnumber larger ones – 98 percent of establishments have less than 100 employees – it is a quite plausible proposition.

Yet the fact that those remaining larger employers account for a hugely disproportionate share of employment – the 2 percent of business establishments with 100 or more employees employ 43 percent of the workforce – has always made me feel that this oft-stated job growth proposition is, at best, incomplete.   Either small businesses are growing into large businesses quite rapidly, or they are destroying nearly as many jobs as they create.

Now that the Bureau of Labor Statistics has begun to track and compile much better data on job creation and destruction by size of firm, these statements can be put to the test.  The answers may surprise, or even frustrate you.  Because it turns out to depend on how you keep score.

What is a small business, anyhow?  It’s hard enough to define the employment threshold that defines “small” when the target isn’t moving.  Is it five employees?  Or fifty?  Or one hundred?  The larger the number, of course, the more meaningless is the description.

But even if we can agree, say, that we’re talking about businesses with fewer than 5 workers, the realities of how businesses constantly expand and contract their payrolls over time makes categorization even more difficult.  Do we categorize before or after a job change?  One BLS report shows that in a recent period, classifying business as “small” in the beginning yields the conclusion that small business created 900,000 net new jobs in the beginning of this decade.  Yet if the classification occurs at the end point, the result is that small business accounts for a 200,000 net job loss.

That kind of sensitivity to simple matters of definition should give us all pause.  But the question remains, which answer to the question of small business and job growth do the experts believe?  Using a sophisticated dynamic categorization scheme, and filtering out job changes that are purely seasonal, BLS researchers says it’s an almost even split.  About 53 percent of net job growth in the last decade has come from businesses with more than 100 employees.  Businesses with fewer than 5 workers accounted for 10 percent of overall growth.

If you don’t like that answer, don’t worry.  You can easily find another. 

Link to this commentary: https://commentaries.cberdata.org/207/the-truth-about-small-business

Tags: jobs and employment, business


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close