In our hearts, if not our actions, small business has always worn a halo in American culture.  After all, almost nine out of every ten businesses in the United States employs less than 20 employees.  So we are a nation of small businesses, right?

Except that most of us work for medium and larger companies.  82 percent of the workforce, representing 85 percent of payroll, is employed by companies with more than 20 workers.  That is even more true in Indiana.  Only eight other states have fewer workers employed by small business than we do.  Indeed, almost 57 percent of our paychecks come from companies with more than 500 employees, a higher fraction than any other Midwest state.

That’s not all bad.  Larger businesses pay more, are more likely to provide benefits, and are less likely to go out of business.  But research studies on the factors driving faster economic growth keep coming up with the same result.  Communities and regions with faster rates of new business formation outperform the rest.  That much is clear.  How, or why, some areas are host to more business startups than others is much less obvious.

But as Indiana continues to search for its way in a national economic environment where its traditional strengths as a low cost production state are less relevant, it may be time to find out.  Even though the risks and sacrifices involved in pursuing a small business strategy to economic development take many Indiana communities out of their comfort zones, the risk of failing to act now to plant the seeds for future growth may be greater.

Recognition of small business’s importance to the economy isn’t new, but the availability of new, large-scale datasets that track individual businesses and workers in the economy in recent years has caused many of us to think of it differently.  Like any body of research, not all studies are in complete agreement, and new questions are raised as older ones are answered.  But they all tell us that the U.S. labor market is a much more dynamic, fluid organism than many would think.

In any given three month period, for example, between 6 and 7 percent of the labor force, on average, lose their jobs.  Their jobs are eliminated because their employers go out of business, suffer business setbacks that force them to cut payrolls, or lay off workers for lack of work.  Some of this is seasonal, and the magnitude of the contraction and expansion in the workforce is hidden from view in the employment statistics by the process of seasonal adjustment.

But if you think that is a bad news story, think again.  Higher rates of job destruction – matched by high rates of job creation – are consistently associated with faster economic growth.  Studies of metropolitan areas show that the faster growing suburbs have job turnover rates as high as 9 or 10 percent, while the more stagnant central cities have a much more stable employment base.  And a recent Census study that divided the entire country up into 394 labor market areas found that when it came to understanding why some areas grew faster than others, the rate of new business formation trumped every other explanation.

Does this hold any water for the Indiana economy?  Our concentration in manufacturing, where capital costs make startups expensive and the rewards to size can be significant, certainly raises the question.  Our industrial base undoubtedly explains why the economies of Indiana and the rest of the upper Midwest tend to have older, larger firms employing us than the nation as a whole. 

But when it comes to new growth, these lessons apply with full force, even in Indiana, simply because manufacturing payrolls are not growing.  Can we find something to take its place?