Is Small Business Overrated?

I’ve written before in praise of the medium sized business, but what about small business? We Americans have an almost mythical relationship with small business. The importance of small business is one of the few things that transcends left and right. We take it for granted that small business is the lifeblood of America, and should be the main focus of government policies, but is there any truth to these ideas.

According to economists, probably not. Forbes reports:

The newest survey of a sample of top economists from the University of Chicago’s expert panel verifies just how uncontrovertial this is to economists. They asked the economists whether they agreed, disagreed, or were uncertain about the following statement:

The federal government would make the average U.S. citizen better off by using policies that directly focus more on increasing small business growth than growth of economic output overall.

The results, summarized in the graphs below, show that economists overwhelmingly disagree with the statement. None agree with it, and only a few are uncertain.

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Many will claim that small businesses are job creators, but the evidence shows this is not true. A 2010 study by Haltiwanger, Jarmin, and Miranda shows that is is young businesses, not small that really matter for job creation. Here is how the NBER Digest summarizes the results:

In this study, which relies on data from the Census Bureau, the authors confirm that smaller companies created more jobs than larger companies during 1992-2005. But the importance of firm size depends very much on the assumptions one makes about the base year of the analysis, the number of employees used to define “small”, and other factors. The real driver of disproportionate job growth, they find, is not small companies, but young companies. It is the startup firms that generate the surge of jobs that earlier research attributed to small companies.

Indeed, grouped in traditional ways, businesses tend to create jobs in proportion to their importance in the economy. Thus, large mature firms – those more than ten years old and with more than 500 workers – employed about 45 percent of all private-sector workers and accounted for almost 40 percent of job creation and destruction in this study.

So there you have it. Small business may be important in our culture, but not to economists. Economists prefer policies that support medium sized business and startups.

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4 Responses to Is Small Business Overrated?

  1. Barneysday says:

    Great post. Small business as defined by the labor department, and as referred to by the talking head politicians, is any business with 500 or less employess. Statistically, this encompasses over 95% of the business’ in the country! So it is a meaningless number.

    I do believe your premise of the newer company being the growth engine is a good one.

    Thanks for the blog

  2. The cultural aspect of small business entrepreneurship should not be underestimated, however. In this age of globalism where traditional jobs have moved from the developed world to the developing world, it is critically important that Americans are encouraged to explore new ways of self-sufficiency. The conventional employer-employee relationship is no longer adequate to meet societal needs. Macro economics explains the big picture quite well, but in the individual lives of people it doesn’t mean very much.

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