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Posted at 05:11 PM ET, 10/31/2011

Small businesses’ economic influence comes under fire

Politicians harp on it, economists point to it, and for many years, small
President Barack Obama pulls a cart loaded with pumpkins at an orchard in Virginia. Obama has identified small businesses as an important part of the country’s economic recovery. (Jason Reed - Reuters)
business lobbyists and support groups have relied on it to sway public opinion in favor of corner stores rather than giant corporations.

Of course, it is the notion that small businesses drive economic growth – and it is coming under attack.

In the past month, several reports show that while small businesses outnumber their larger counterparts, they nevertheless collectively employ fewer people, create fewer jobs and account for less wages than big companies. In response to the data, some analysts have called for government leaders to place less emphasis on small business interests in their efforts to resuscitate the American economy.

“The notion that small business is the force behind prosperity is not true,” Charles Kenny, a fellow at the Center for Global Development and the New America Foundation, wrote in a Businessweek story published earlier this month. “The longer the U.S. and other countries cling to this myth, the harder it will be to carry out the kinds of economic policies that might actually stimulate job growth.”

Kenny notes that, according to the latest census data, 90 percent of companies with workers on payroll employ fewer than 20 people; however, those firms account for merely 20 percent of all jobs in the United States. What’s more, nearly one out of four workers at companies with fewer than 100 employees quits or is fired every year, compared to only 8 percent at companies with more than 2,000 employees.

Small firms aren’t creating nearly as many new jobs, either. Most recently, Treasury Department research showed that small businesses (defined as those with income between $10,000 and $10 million) account for roughly 99 percent of all businesses but merely 17 percent of new jobs. That’s largely explained by the fact that less than one out of four of those companies have hired any employees – the majority are one-person operations that pay no wages whatsoever.

The oft-touted connection between small business prosperity and economic growth looks all the more fuzzy when you glance outside the country. The New Yorker notes that the countries with the highest percentage of workers employed by small businesses include Greece, Portugal, Spain and Italy – each of which has played a leading role in the European Union’s current economic nightmare.

On the other hand, nations with strong economies like Germany, Sweden and Denmark are among those with the smallest percentage of workers employed by small businesses. Coincidence? Not according to another recent study by Dartmouth’s Rafael La Porta and Harvard’s Andrei Shleifer, which found that a nation’s wealth was inversely proportional to the amount of its workforce employed by small businesses.

So where should policy makers focus their efforts when crafting economic recovery plans? That’s where we find very little consensus, with some arguing the United States should shift support to large corporations, others touting the importance of early-stage startups, and still others urging increased emphasis on the mid-sized companies that fall smack dab in between.

By  |  05:11 PM ET, 10/31/2011

 
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