With unemployment stuck above 7 percent, policymakers have been searching anxiously for ways to put more people back to work. However, the first step in that process may be the most complex — simply identifying which type of business actually creates jobs.
Commonly, the argument boils down to three groups: start-ups, small businesses and large corporations, each of which has unique policy interests in Washington.
Most likely, it will take a joint effort, but researchers and economists have starkly different views on which group should take priority as the administration and lawmakers try to jumpstart the labor market.
Here are some of the basic arguments for championing the interests of each sector, as well as the prevailing skepticism about each one’s potential to lead the recovery.
Small businesses: The backbone of the economy?
President Obama has used that line on several occasions to describe the importance of small businesses, as have scores of other politicians. In support of that title, many have cited studies from the U.S. Small Business Administration that show small firms employ just over half of the private-sector workforce and created nearly two-thirds of nation’s net new jobs over the past decade and a half.
However, the definition of “small business” provides important context for those statistics. The SBA considers firms with fewer than 500 employees small, placing nearly every business in the country (99.7 percent of firms that have employees) under that umbrella term — thus, it is no surprise they employ the most workers.
A more strict definition of small business, using a limit of 50 employees, would still include the vast majority of the country’s businesses, but it would trim their share of the workforce to less than a third.
Furthermore, employing a large number of workers doesn’t necessarily translate into creating a large number of new jobs. A study by the Kauffman Foundation, an entrepreneurship research organization, showed that existing firms actually lost about a million more jobs than they added every year between 1977 and 2005.
That’s largely because most employers aren’t interested in growing past a certain point. Only one in four small business owners are interested in expanding their company, according to research at the University of Chicago; once they reach a certain size, the best case scenario for most is that they simply hold steady.
But those that are hiring are helping, creating 8.7 million jobs between March 2011 and March 2012, and some believe policymakers should simply help more firms join that small group of expanders. In a column last week, SBA Administrator Karen Mills argued that “while start-ups receive a great deal of attention, there is another segment of businesses that can fuel economic growth—existing establishments.”
Moreover, adding new positions isn’t the only way existing small businesses create jobs, according to Bill Dunkelberg, chief economist for the National Federation of Independent Business. It also happens when they bring back workers they let go during tough times.
“The jobs problem we face today, in fact, is that employment is below capacity in existing firms,” Dunkelberg wrote earlier this month, noting that many of the 8 million workers who lost their jobs during the recession were employed by small businesses. “Public policy should focus on what might be done to spur those firms to re-employ workers who had jobs at the peak of the expansion.”
Small business lobbyists have asked lawmakers to support proposals to lower individual tax rates across the board, eliminate time-consuming regulations, bring down the cost of health care and stop borrowing rates from surging — each of which, they say, forces employers to pull back on investing capital back into their firms.
At the same time, overall economic uncertainty and weak sales have been cited as a major concern ever since the recession, and small business owners have urged elected officials to take any and all steps to put more money back in the hands of their customers.
New businesses: Not enough start-up support?
A growing contingency of economists believe start-ups are the most reliable job creators, pointing to studies that show new firms are responsible for nearly all of the nation’s net job growth every year (total job gains minus total job losses). In fact, the National Bureau of Economic Research has shown that, when controlled for company age, there is actually “no systematic relationship” between firm size and job growth.
Meanwhile, hiring by new firms remains fairly constant during times of economic growth and decline, while hiring by existing firms ebbs and flows with each cycle.
But how long will those jobs last?
Census data shows that fewer than half of the positions created by start-ups still exist after five years, and net employment growth falls off quickly as companies grow older; evidence that those jobs may not be as stable as the ones at longstanding establishments. Nor, apparently, are they as lucrative, as employees at start-ups generally earn only about 70 percent as much as those at existing businesses.
In addition, job creation by new firms, though still high, has been dropping steadily over the past decade. A Kauffman study showed that the average number of workers at start-ups has been falling since 1998, while the rate at which they add new workers has been falling since 1994.
It doesn’t help that the rate of new business formation has been sliding, too.
“Even before the Great Recession, firms were starting smaller,” authors E.J Reedy and Bob Litan wrote in the report. “They were opening their doors with fewer workers than the historic norm and were relatively reluctant to expand their workforces even during good economic times.”
As a result, they expect ventures started in the past few years to contribute fewer jobs than those launched in previous decades. Nevertheless, even at that slower rate, job creation by start-ups is expected to continue to outpace that of existing businesses.
Separting themselves from traditional small business owners, many of whom are primarily concerned with sluggish sales and high taxes, start-up founders are typically more interested in policies that would help them access more early-stage capital and hire more talented workers.
The first concern was addressed, in part, by the JOBS Act, which authorized the use of new online crowdfunding portals (however, regulatory delays have pushed back their launch). More recently, the Senate introduced an immigration reform proposal with provisions meant to help more firms bring in talent from around the world.
Big businesses: Jobs aplenty, but where?
Imagine for a moment that you own a business with 300 employees, one of whom, your most efficient worker, produces more than a third of your company’s products. Suffice it to say, you would make that one worker’s well-being a top priority, and you would push your other employees to reach his or her level of productivity, no?
Now, think back to that earlier statistic from the SBA. Small businesses, which represent 99.7 percent of all employers, generate less than two-thirds of the country’s new jobs — which means the 0.3 percent of firms that are large (one out of 300) punch way above their weight by creating one out of every three new jobs.
So, if job creation is the aim, shouldn’t policy makers be trying to make life as easy as possible for large employers and supporting solely those small businesses that are trying to grow into big corporations?
It makes for a less popular stump speech, but large firms are a vital player when it comes to job creation. Over the past two decades, for example, small and mid-sized businesses have held a larger share of the country’s overall employment (29 percent and 27 percent, respectively) than they have of total jobs added (16 percent and 19 percent). During the same period, companies with more than 500 workers employed about 45 percent of the workforce yet contributed 65 percent of the jobs created since 1990.
Those jobs may be more valuable, too, considering large firms have historically paid significantly higher salaries than their smaller counterparts. On average, small business employees currently earn about 50 percent lower wages than those paid to workers at large companies.
But here’s the question for big business supporters: Where are the jobs being created?
A major pushback against corporate interests is that, once they are large enough, firms often start hunting overseas for cheaper labor options.
During the 1990s, American multinational companies added 2.7 million jobs in foreign countries and 4.4 million in the United States. But over the following decade, those firms continued adding positions overseas (another 2.4 million) while cutting 2.9 million jobs in the United States.
The bottom line: The latent job-creation potential from large businesses isn’t very much use to the U.S. economy if used solely to churn out new openings overseas.
Other critics of big businesses have suggested they fall short on research and innovation.
Looking solely at some of the country’s most inventive firms (those that have been awarded more than 15 patents in a four-year period), the small ones produced 16 times more patents per worker than the large firms in the group, according to data from the SBA. Studies have shown that type of research and development at small firms often corresponds to a significant infusion of jobs.
However, the most common criticism against politicians bolstering large corporations is that those firms simply don’t need any more help. Big business lobbyists have long had sway in Washington, and some point to the recent economic turmoil as evidence that pushing their policy interests isn’t working for the broader economy.
Still, their overall share of employment and history creating jobs cannot be overlooked, especially when the unemployment rate seems stuck in neutral. Some business leaders have suggested the governement could encourage large firms to pull back on outsourcing by lowering the nation’s corporate tax rate, which is now the highest in the world.
Their theory is certainly disputed, but the idea is that, by bringing down the rates, more corporations would be inclined to bring jobs back to the United States — and in the process, help start-ups and small businesses jumpstart the economy.
Which group do you believe holds the key to economic recovery? Please share your take with us in the comments below.