Due primarily to the work of David Birch Job Creation in America: How Our Smallest Companies Put the Most People to Work [1987], government has been convinced that most jobs are generated by small business. That's why government policies have favored giving tax breaks and other subsidies to small business. But wait; does small business really create more jobs than other sectors? Recent work suggests otherwise. Birch provided the first evidence in support of the argument that small businesses are the primary engines of job growth, claiming that 66% of all net new jobs in the United States during 1969-1976 were created by firms with 20 or fewer employees and 81.5% were created by firms with 100 or fewer employees.
This is from the report, "Do Small Businesses Create More Jobs?" by Neumark, Wall and Zhang:
Birch’s argument about the important role of small business in job creation fit perfectly with the U.S. government’s long tradition of supporting small businesses. As early as 1953, the U.S. Congress passed the Small Business Act with the intention to aid, counsel, assist, and protect the interests of small businesses. Under this act, the federal government established the Small Business Administration to ensure that a fair proportion of government contracts went to small businesses. The Small Business Administration also makes direct loans and guarantees bank loans to small businesses, based on the perspective that assisting small businesses is important to preserve free competitive enterprise and to maintain and strengthen the U.S. economy. Birch’s findings fed into this thinking and quickly became conventional wisdom. Since then, his findings have often been cited as justification for favorable government regulations, tax incentives, and support programs for small businesses.
One important thing to consider (which is entirely glossed over by the main stream media) is the concept of net job creation. In the paper referenced above they make the distinction between gross job creation, gross job destruction and net job creation which is the difference between the two. So when we hear it reported that there were 67,000 private sector jobs created last month, is that gross or net? They never say. When the government says that they "saved" 3 million jobs, is that gross or net? They never say so I assume that they want to put the rosiest face on the statistics and, therefore, it's probably gross. The net job savings could be anything. Each month jobs are both created and destroyed. Therefore, it's important to know the difference between the two or net job creation. Any other figure is BS. If they tell you how many jobs were created without also telling you how many jobs were destroyed, you essentially know absolutely nothing about jobs and the economy.
The Neumark paper took a critical look at Birch's contention that most new jobs are created by small business. What they found is that, although small firms are responsible for a disproportionate share of job creation, they are also responsible for a disproportionate share of job destruction. This makes sense since a lot of start-ups go out of business which results in gross job destruction. So net job creation by small business is a lot smaller than previously thought. Also large businesses, while responsible for creating proportionately fewer jobs are also responsible for destroying proportionately fewer jobs so that their net job creation data looks more favorable than previously reported.
Nevertheless, Neumark et al did find that in general small businesses create more net jobs than large businesses although not to the extent that Birch originally indicated. They also verified that the manufacturing sector is losing jobs while the service sector is gaining them.
Another report, European SMEs Under Pressure, Annual Report on Small and Medium-Sized Enterprises 2009, asks the same questions about job creation in Europe.
Between 2002 and 2008, SMEs [Small and Medium Enterprises] in the EU-27 grew strongly and turned out to be the job engine for much of the European Economy. The number of SMEs increased by 2.4 million (or 13 %), whereas the number of large enterprises increased by only 2000 (or 5 %). This growth was also reflected in employment figures. On average, between 2002 and 2008, the number of jobs in SMEs increased by 1.9 % annually, while the number of jobs in large enterprises increased by only 0.8 % annually. In absolute numbers, 9.4 million jobs were created in the SME-sector between 2002 and 2008.
Interestingly, while Europe was creating 9.4 million jobs, the US, during the Bush administration in roughly the same period, created only 3 million. So Europe created 3 times the number of jobs as the US in the period immediately preceding the Great Recession. Similar to the US, Europe's small and medium enterprises create more jobs than do large scale enterprises. Entrepreneurialism is just as important in Europe as it is in the US contrary to popular myth about Europe's "welfare" societies. SMEs are defined as businesses which employ less than 250 persons.
In 2008, there were over 20 million enterprises in the European Union. Only about 43,000 were large scale enterprises (LSEs). Hence, the vast majority (99.8 %) of enterprises in the EU are SMEs. The vast number of employed people in Europe are employed in micro enterprises (less than 10 people) which comprise 92% of total enterprises and 30% of employees.
Contrary to popular belief, more people in Europe are employed in small scale enterprises than in the US. In the US 22% are employed in micro enterprise; 30% in Europe. In the US 14% are employed in small business vs 21% in Europe. For SMEs (comprising micro and small business enterprises) the figures are 53% in the US, 67% in Europe. As a contrast 47% are employed in large scale enterprises in the US vs 33% in Europe. A case could be made that Europe is a more entrepreneurial society than the US based on these figures.
In the US from 2002 to 2006, firms with 100-499 employees contributed the most to employment growth whereas in Europe SMEs have been the job generators. Thus in the US, contrary to popular belief, it is the medium and large scale enterprises that have added the most to employment growth in recent years. Remember that enterprises with more than 250 employees are LSEs.
Because a lack of market demand is now the major problem for SMEs, the need for stimulating demand should be a prime concern for European policy makers. Given the large government budget deficits, increasing government expenditures or lowering taxes are not very realistic options for most countries. However, measures to facilitate and promote exports would directly support SMEs that export their products or are subcontractors to exporting businesses. In addition, as exports now are a major engine of the economic recovery, many more SMEs will indirectly benefit from
such policies. In the US due to free trade policies, exports are lagging badly behind imports with the result that the US is running staggering trade deficits.
Over 2009 and 2010, the EU-27 SMEs are estimated to have shed a total of 3.25 million jobs. This is far less than the number of jobs shed in the US during that period which amounted to around 8 million.
Access to finance is not the main problem for SMEs in the EU. Since demand for products and services of firms have decreased sharply during the crisis, many firms do not feel the need to invest, and hence do not apply for bank loans. About half of euro area SMEs
reported no major change in financing needs in both the first and the second half of 2009. The most pressing problem facing euro area SMEs in the first half of 2009 is ‘finding customers’ or in other words, demand. This is true also in the US. Access to finance is the second most important problem. Indeed, a UK survey among 800 SMEs interviewed between November-December 2008 finds that in 2008, market demand constraints are regarded 94% higher than finance constraints. Also in the US poor sales are currently a more important problem than access to credit especially since US corporations are sitting on $2 trillion in cash.
These two reports suggest that not only is Europe in general more entrepreneurial than the US due to its small and micro enterprises employing relatively more people, but also it didn't lose as many jobs during the recession and created many more jobs than the US in the years just preceding the recession. One of the ways jobs were saved during the recession was to cut back on work hours with the government subsidizing the paychecks of workers to make up the difference. This was considered to be more desirable than paying unemployment compensation to laid off workers.
