What May be the Most Commonly Misunderstood Fact About the Job Market

October 15th, 2011 at 11:17 pm

I was listening to this Diane Rehm show today when the guy from the small business lobby (NFIB) was asked whether most workers were employed by small firms.  He misleadingly said they did.

This is widely misunderstood, but the fact is that most businesses are small, but most employees work in large firms (the figure below focuses on “establishments” rather than firms—the former is a single physical place of business; firms can incorporate numerous establishments; the main result is insensitive to this difference).

The figure shows that most businesses employ few workers.  Just about 50% employ four or fewer workers, and 80% of businesses employ fewer than 100 workers.

Source: Census, Table 2a, data are for 2008

But as the second bar in each group—number of employees—shows, about half of all employees work in firms of 500 or more workers and two-thirds work in firms of at least 100 workers.

Payroll (total compensation) is even more skewed: 57% is paid out by firms of 500 or more workers; only 30% of payroll is paid by firms of less than 100 workers.

Nor is it the case that small businesses, per se, are the engine of job growth their advocates claim.  Research like this finds that “once we control for firm age there is no systematic relationship between firm size and [job] growth.” As I stress here, that research shows that it’s surviving startups that are particularly important in terms of generating new jobs.

So, summing up, small businesses, say those with 100 workers or less, account for a minority of both workers and payrolls, and are not the primary engine of job growth.

Why then all the favoritism in policy circles, which is especially problematic if you listen to the one-sided agenda of their guy on the Diane Rehm show (e.g., his organization is against extended unemployment benefits because their members allegedly report that recipients won’t take jobs until their benefits run out; Larry Mishel, along with a bunch of folks who called into the show, did a good job of calling him out)?

In part, because they need and deserve help.  Larger firms have fewer credit and cash flow challenges, nor do they operate on such tight margins.  It’s easier for larger firms to sell into and expand foreign markets, which is especially useful to them right now, as that’s where the growth is.

But the political clout of small businesses and the misrepresentations of folks like the guy on this show are a big problem in our politics.  In this regard, small is not beautiful.

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19 comments in reply to "What May be the Most Commonly Misunderstood Fact About the Job Market"

  1. Maurits Bruel says:

    This explanation isn’t completely satisfactory, as the source of employment growth is not taken into account. A business hiring one extra employee adds one job to the economy, that is net growth. Small businesses tend to only grow this way. The question is whether employment growth in larger businesses is actually employment growth. Larger businesses do not only grow by hiring individuals, but also by taking over small businesses. The result of a take-over may well be net job losses, even though it shows up in the statistics as job growth for the large company.
    In itself, this mechanism is healthy, as the net job loss is a sign of increased efficiency (until is becomes a sign of market failure) But in order for the economy as a whole to profit from this, the employment loss from efficiency gains must be offset by new job creation. So the real research question here is: where are the new jobs created? At the moment, it is obvious that the amount of new jobs created is simply too low. The rate of job loss by efficiency gains and off-shoring is greater than the rate of new jobs creation.
    Focusing on large businesses because that is where the jobs are is like focusing on the 1% because that is where the wealth is. With jobs as with wealth, it is important to know where they are created, not just where they end up.


    • Maurits Bruel says:

      PS: another fallacy may be the fact that the cutoff number of 19 or 99 people means that no company who has close to that number of employees can grow anymore, it will simply move to another category. The large category lacks such a maximum limit.


    • Jeff Carter says:

      In addition to where the new jobs are created and the quality of those jobs, also be curious as to *who* is being hired. I’ve long wondered whether smaller businesses or more or less likely to hire people with perceived barriers to employment: low-skilled, the long-term unemployed, older individuals, people with disabilities, ex-offenders etc. In other words, whatever number of jobs small or large businesses generate, is one or the other more likely to take a chance on the chronically un- or under-employed?

      I am not an economist or extensively knowledgeable about this stuff by any stretch, so perhaps this data exists and I am not aware of it.

      It seems to me that our adult education and workforce policies assume that the higher rate of job growth for these individuals is more likely with larger industries and larger employers.

      At the same time, where I live (D.C.) there are neighborhoods with very high rates of unemployment, lots of long-term, low-skilled unemployed, and few prospects for jobs in larger businesses. So I wonder if policies that promote the growth of small business in those neighborhoods — along with an investment in adult ed and job training skills that matches up with what those small businesses need — might get more of these folks into jobs.

      I have this (quite possibly fanciful) notion that the neighborhood mom and pop business is more likely to give the kid who just got out of prison a chance than a large corporation is, but, as Herman Cain is fond of saying, “I don’t have the facts to back this up.”


  2. Christiaan says:

    Here you are making the classic mistake of level versus rate. Now, you may be right that big companies make for more growth than small companies, but not because of anything you’ve said here.

    Moreover, in many cases today, big companies grow by gobbling up successful small startups. So is that growth by small companies or by large? The thing is, the growth end up for the big companies, but it was a small company that actually created the growth.

    And then there’s the question of quality versus quantity. Arguably, big companies lead to lopsided growth, with almost all the growth in pay going to a few guys at the top. Small companies generally distribute the growth in pay much more evenly. So small companies lead to a bigger growth for the median, while big companies lead to almost no growth for the median. I think this is very well illustrated by the noughties, or for that matter the last three or four decades.

    I would associate the word “beautiful” to quality, not to quantity as you do here. So I see no support for your final claim.


    • Jared Bernstein says:

      Um…not sure what you mean. My point is that contrary to conventional wisdom, though most firms are small, most people work at large firms. QED (see figure).


      • Christiaan says:

        That’s your starting point. However then you proceed, and draw conclusions about growth, which IMHO are not following from this data.

        You say: “So, summing up, small businesses, say those with 100 workers or less, account for a minority of both workers and payrolls, and are not the primary engine of job growth.”

        Job growth is about *rate*, total employment is about *level*. Moreover, I think big businesses have much bigger political clout relative to small business, so I really don’t see your last point. And I have my doubt whether big companies that work a lot *outside* the country (as you argue large companies are good at) are best for employment *inside* the country.


        • fyzzics says:

          No, the conclusions about growth were not from the distribution of employment – they come from creation and destruction statistics from the Census Bureau’s Business Dynamics Statistics analyzed by Haltiwanger, Jarmin, and Miranda in the paper Jared provides a link to. Basically, in terms of net job creation, a quick look at that paper suggests that although it looks like most of the net job creation comes from small business, it’s really more that most net job creation comes from young firms, and young firms tend to be small. Looking at the raw numbers, though, it looks like about 60% of net job creation comes from firms with less than 500 employees and 40% from bigger firms.

          It’s rather complicated, trying to tease all this out from the statistics.


      • Wayne says:

        I don’t see the data regarding job creation here.


  3. davesnyd says:

    In part, because they need and deserve help. Larger firms have fewer credit and cash flow challenges, nor do they operate on such tight margins. It’s easier for larger firms to sell into and expand foreign markets, which is especially useful to them right now, as that’s where the growth is.

    It’s more than that.

    I think you’ll find that larger firms pay much lower effective tax rates because they have the accountants to find loopholes and the lobbyists to create them.

    Larger firms have an easier time understanding governmental regulations– because they can hire the lawyers to explain them and, again, the lobbyists to shape them.

    Finally, larger firms, at least in theory, get economies of scale for all sorts of things– supplies, transportation, benefits, sites.

    So change the tax code to make sure that corporations don’t have tax advantages.

    Every governmental regulatory agency should have an ombudsman’s office for small businesses.

    Address the credit and cash flow challenges through improved small business agencies in government and by restructuring the banking system in ways that could benefit small businesses.

    Take the benefit overhead off of small businesses by offering Medicare for everyone.

    Invest in public infrastructure– including better faster trains and better roads, highways, and bridges– to reduce the cost of shipping to market.

    Invest in education so that all businesses have better educated employees.


  4. Gus Halberg says:

    I did some research on this at BLS a year or two ago.

    As I recall, not only do most people work for large companies, but the overall percentage is growing, up by 2-3% over the previous decade.


  5. save_the_rustbelt says:

    While I agree the “small business creates most jobs” theme is oversimplified, this smack down is neither warranted and it too is oversimplified.

    There are several layers and levels of small businesses, and each is much different, has different needs and produces different results.

    The idea that small business owners have such immense political power is well, strange. Bad day Jared? One interview puts you in a bad mood? Come on….

    I also sense a little of the “rural America is insignificant” theme we get out the elite in this country. Apologies Jared if I am reading that wrong.

    The Obama administration is weak, drifting and confused. Now that is a problem.

    (As an aside, Obama’s OSHA seems to be targeting small non-union contractors in the midwest for constant punishment. Orders from the AFL-CIO or bureaucrats gone wild?)


  6. David Kaib says:

    I think you mistake the rhetorical power of the idea of small businesses as it is used by those who represent big business for the power of small businesses. Effectively burst this bubble and the power of big business would be lessened.

    “In part, because they need and deserve help. Larger firms have fewer credit and cash flow challenges, nor do they operate on such tight margins. It’s easier for larger firms to sell into and expand foreign markets, which is especially useful to them right now, as that’s where the growth is.”

    These advantages enjoyed by big business sound in power in policy making. Other than the rhetorical centrality of small business, I don’t see their relatively stronger power than big business.


  7. kio says:

    Small firms are more sensitive to the change in economic conditions. During recessions, they have a much higher probability to be extinguished and that’s why they need special protection. When the economy grows at a healthy pace, smaller firms are easier to start and a higher percentage survises. This dynamics was confused with the driving force behind real economic growth.

    Some people think that smaller firms can be created artificially and that may help to speed the economy up. Data (http://www.ces.census.gov/index.php/bds/bds_database_list) show that small firms just react.


  8. Jonathan says:

    Jared I’m not sure you can find this. But I recall last year watching a panel on “this week” in which Andrew breitbart (or another conservative thinker-i cant recall) made the same claim and was quickly taken down by both Donna brazil and George will for it. So yes we can be bipartisan in removing these false notions! You should find that and post it as well!


  9. dilbert dogbert says:

    Same as the use of “Family Farms” by big Ag. The Salyers and Boswells of California are “Family Farmers” Yah Sure!


  10. ECON says:

    A close reading of JB’s article and QED statement is correct. Argue with Census and other issues but the FACT does not lie.


  11. Graham says:

    You fallaciously imply that because large corporations employ more people, they are better.

    While it is a fact that large corporations employ more people, the real question is: “is it better for an economy to be based on more small or more large companies”.

    Still it is irritating when people skew facts and terms in favour of their agenda, as with the NFIB. If they wanted to make sense while drumming up support they would focus on how small business might celebrate higher-morale, creativity, and innovation, which is in the better interest of America’s long-term economy.

    Graham


  12. But.. says:

    It’s often repeated that small firms produce a lot of jobs. It’s often forgotten that small firms lose a lot of jobs. The two more or less balance, which is why small firms are not the source of over-all job growth they are claimed to be.


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