The Big Business of Small Businesses

By: Dr. M. Ray Perryman
Published in syndication May 17, 2017

Small businesses generate substantial economic activity. They cover the spectrum from new tech startup to well-established retailer, and it has long been acknowledged that they are important sources of new jobs (though early studies were overstated).

The US Bureau of Labor Statistics (BLS) tracks job gains and losses by firm size. As of the third quarter of 2016, firms with 1-49 employees had contributed 30% of net job growth over the past year, while firms with 50-249 employees contributed 17% and firms with 250 or more employees contributed 53%. In the third quarter of 2016 alone, firms with 1-49 employees had a net employment gain of 133,000, firms with 50-249 employees gained a net 84,000, and firms with 250 or more employees gained a net 464,000.

Looking behind these net numbers reveals an important aspect of employment patterns by company size: small firms generate millions of jobs, but they also eliminate millions of jobs. During the third quarter of 2016, firms with 1-49 employees added more than 3.1 million positions, far more than the 1.1 million gross gain by firms with 50-249 employees or 2.0 million by firms with 250 or more employees. However, the smaller firms also eliminated nearly 3.0 million over the same period. That's almost three times the number in medium (50-249 employees) firms and twice the number of losses in large (250 or more employee) firms.

When you hear talk about how small companies drive job growth, it sometimes stems from this gross-versus-net difference. Yes, small firms do a lot of hiring, but they also shed a lot of jobs. On a net basis, larger firms typically add far more positions that last.

A few years ago, researchers at the Federal Reserve Bank of St. Louis studied gross and net job gains by firm size between 1992 and 2010. They found that firms with fewer than 20 employees generated almost 30% of gross jobs and firms with more than 500 gained less than 26%. When losses are also factored in to get a net job gain basis, however, the small companies added only 15% of the total while the large ones contributed nearly 38%.

A contributing factor to the high level of job gains and losses in smaller firms is their sheer number. Approximately three of every four private-sector firms across the United States have fewer than 10 employees, with well over half having less than five. These millions of businesses (about 3.8 million in 2016) are responding to changing conditions in their individual geographic locations and business niches by adding workers and letting them go as needed. Larger companies are often more diverse and deal with fluctuations that are broader in scope (national and international in many cases), with gains in some areas offsetting losses in others. Larger firms may also have other attributes that tend to smooth out the hiring pattern, such as more rigorous hiring procedures, better forecasting of future revenue, and additional financial resources to deal with temporary downturns.

In Texas, there are about 360,000 businesses with fewer than 20 employees (ignoring the millions that actually have zero employees). They are concentrated in professional, scientific, and technical services (with more than 55,000 firms); health care and social assistance; retail trade; and other services.

In thinking about firm size, it is also relevant that small businesses may go on to become huge firms. A single store could become the next Walmart, and a technology start-up could grow into Microsoft. Other companies will remain small throughout their lifespans.

Small firms often face special challenges ranging from growing pains to a lack of certain skills or information. Support needed may include help developing business plans and finding venture capital, assistance in dealing with taxes or employee issues, or aid in navigating complex procedures such as beginning to export to other countries. Effective assistance programs can be invaluable and are worth supporting. A variety of entities are available to lend a hand, both in the public sector (such as the Small Business Administration) and in the private sector (such as American Express through the OPEN forum).

The millions of small firms across the nation are sources of new jobs, innovation, and economic activity. They consistently account for a substantial proportion of overall growth, and offer opportunities in a wide variety of locations and industries. The very dynamism that leads to jobs coming and going in large numbers is also reflective of a nimbleness frequently missing in larger entities. This flexibility, in turn, can be a catalyst to new ideas, approaches, technologies, and innovations that ultimately drive overall prosperity.