The Myth of Small Business Job Creation

BOSTON (TheStreet) -- We often hear talk of how small businesses are the backbone of the American economy and the predominant driver of employment.

That's more rhetoric than reality, according to a trio of researchers at a Cambridge, Mass., think tank.

Economists John C. Haltiwanger, Ron S. Jarmin and Javier Miranda make the case that, contrary to conventional wisdom, small, mature firms (a decade in operation and with 50 or fewer employees) may actually be slowing job growth.

Their assessment comes in a paper published last month under the auspices of the National Bureau of Economic Research, which charts and announces when recessions begin and end. The paper was given national exposure earlier this month by Newsweek.

"The notion that growth is negatively related to firm size remains appealing to policymakers and small-business advocates," they write.

"Statements that small businesses create most net new jobs are ubiquitous by policymakers. A common claim by policymakers is that small businesses create two-thirds or more of net new jobs. Every president since President Reagan has included such statements in major addresses."

Public policy, and the distribution of tax dollars, follows.

But it's a myth, they say.

The researchers concludes that there is "no systematic relationship between firm size and growth." Where there is a pattern, it shows that small businesses can actually detract from job growth. It cites, as an illustration, that in 2005, small businesses lost approximately 1 million jobs, even as the overall economy expanded by about 2.5 million.

Their research draws upon data produced by the Census Bureau's Statistics of U.S. Business. Released in partnership with the Small Business Administration, it represents the first time data users can examine net and gross job creation and destruction by firm size and age.