The Myth of Small Business Job Creation

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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.

Despite its attempt to alter the common dialogue, the trio's paper does not dispute the importance of small businesses and points out that "startups contribute substantially to both gross and net job creation." It stresses the importance of public policy that fosters the creation of young start-ups and supports their efforts -- but the key is how old a business is, never its size, and public policy looking at size is likely to send tax dollars astray.

"More generally, young firms are more volatile and exhibit higher rates of gross job creation and destruction," they write. "After five years about 40% of the jobs initially created by startups have been eliminated by exit. However, we also find that, conditional on survival, young firms grow more rapidly than their more mature counterparts. Understanding the process of job creation by private-sector businesses requires understanding this dynamic. Policies that favor various simply defined classes of businesses (by size, for example) and ignore this fundamental dynamic will likely have limited success."

Underscoring the message is the latest monthly ADP National Employment Report, which shows private-sector employment decreased by 10,000 jobs from July to August. Small and medium-sized businesses -- those under 500 employees -- shed 11,000 jobs. Those losses were offset by the roughly 1,000 jobs created by companies of 500 and more workers.

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