Small & Large Business Employment
CoRev brought up the claim that small firms account for 70% of job creation in the US economy.
Several years ago the Small Business Administration and Census began an annual survey of employment by firm size.
You can find the data here:
http://www.census.gov/econ/susb/historical_data.html |
Here is a table of what the joint survey of employment by firm size found. From 1988 to 2006 — the most recent year published — small firms (under 500 employees) share of total employment fell from 54.5% to 50.2% of private employment. Over the entire period employment by small firms grew 13.3% while large firms employment grew 21.8%.
That sure does not look like small firms account for 70% of employment growth.
Care to show us the data supporting the claim that small firms account for 70% of job growth.
The other interesting results of the survey was that payroll per employee in large firms averages 125% of that in small firms. The Small Business Administration published a study that claimed small business account for over 50% of business real GDP. They based this result on the claim that productivity was much larger in small firms. But if small firms salaries are so much smaller than large firms salaries I find it hard to accept that their productivity is higher.
In the comments I was sent to the BLS to look at the business Dynamics data. I confess I was familiar with the data, but had never looked at it in terms of firm size. Yes, in a summary statement the BLS says that small firms account for some two-thirds of job growth over the period 1993-2009 that would seem to support the claim that most jobs are created by small firms. But within the BLS business dynamics database they also publish data on the level of employment by firm size. According to the same data, One of the main expenses today for any established business is the cost of their business electricity and gas supplies, this is why lot’s of companies are now using energy brokers like Powerful Allies to help in energy cost reduction.This data agrees roughly with the SBA-Census data that most employment growth was in larger firms. Obviously this is inconsistent with the same source — BLS Business Dynamics — stating that most jobs were created by small firms.
To be honest, I am confused. Can anyone explain this?
The other great myth that is continously trotted out is that we need to keep taxes low on folks making over $200K a year to spur the economy because those are the small business owners who are not going to employ people unless their taxes are low. I am a part owner of a small business that employs around 300 people. We decide to employ new people whenever we figure that we can make a profit doing so. That depends on what we can obtain that person’s services for and what we can sell that person’s services for in the market. Right now the cost of employing new people is not particularly high, but the price we can get for that person’s services is a function of demand and that isn’t oo high either.We take all of the profits out of the business every year and each owner pays income taxes on his or her share. If tax rates increase each of us will have less after tax money to spend or save–actually we will all probably max out our 401K contributions–but it will have no effect on hiring. Now if demand for our services increases that will certainly spur hiring.
Appaqrently the Republican party, that great bastion of small business owners, has never heard of the concept of retained earnings whereby you can keep your profits in a business inside the firm and invests it in growing the business without ever paying any taxes on it.
“has never heard of the concept of retained earnings whereby you can keep your profits in a business inside the firm and invests it in growing the business without ever paying any taxes on it.”
I’ve heard of that concept. It’s a very good one, some countries use it. However, the USA does not. Corporate income tax is payable upon retained earnings in corporations.
“But if small firms salaries are so much smaller than large firms salaries I find it hard to accept that their productivity is higher.”
Umm, “productivity”, if we’re talking about labour productivity, is calculated as the output created by a certain input of labour. And the input of labour is counted by how much is paid for it. Thus, if wages are generally lower in small companies they are likely to have higher labour productivity *because* not in spite of lower wages.
Care to show us the data supporting the claim that small firms account for 70% of job growth.
http://www.bls.gov/web/cewbd/table_d.txt
This is “Table D. Average percentage share of gross job gains and gross job losses by firm size, third quarter 1992 – third quarter 2009, seasonally adjusted”
which shows the cumulative share of net [job] change is 66.3% for firms employing 499 or less.
m.jed– interesting. we have two survey by respected organizations that directly contradict each other.
Tim — I believe you are wrong about retained earnings being taxed in the US.
My tax lawyer says the IRS will only tax retained earnings when it is blatantly obvious that firms are using it to avoid paying taxes. Other wise, retaining earnings to finance capital spending is tax free.
Lie, Damned lies, and Statistics:
“That sure does not look like small firms account for 70% of employment growth.”
Depends on your interpretation of employment growth. Remember, small businesses fail a lot. If you subtract the employment losses from those failures from the growth number, you do not get 70%.
What does that have to do with our current situation? I can’t really say, but it may be good to subsidize small business hiring now, even if they fail in a couple of years.
Spencer, now what? Of course we can take apart the BLS numbers versus the Census #s, but I doubt we really want to uncover or compare the two methodologies.
Anyway, why the snark in one comment: “Appaqrently the Republican party, that great bastion of small business owners, has never heard of the concept of retained earnings whereby you can keep your profits in a business inside the firm and invests it in growing the business without ever paying any taxes on it.”
And then the self rebuttal? “Tim — I believe you are wrong about retained earnings being taxed in the US.
My tax lawyer says the IRS will only tax retained earnings when it is blatantly obvious that firms are using it to avoid paying taxes. Other wise, retaining earnings to finance capital spending is tax free.”
That ole desperation thing is getting to be embarrassing. Your guy and his staff are duds.
CoRev see my addendum.
The BLS appears to report two conflict claims within one data base.
Um, no. In the productivity data, input is counted in terms of hours, not cost. That is in order to keep input consistent with output, which is measured in units of product, not the dollar value of product.
m.jed,
I was the one who challenged the notion that small businesses account for 70% of jobs. The point I made was that net employment is a very different matter than gross employment. Small firms go in and out of business faster than larger firms, so turn over employees faster. Actual employment rises and falls by net job turn-over. Realize you weren’t there for that, but the 70% figure is misleading when used to argue that small business is the engine of job growth. It is more realistically an engine of job growth, the engine of turn-over.
Can anyone explain this?
Just a guess, but if the number of large firms grew faster than the number of small firms, but employment changes at small firms was at a faster rate than at large firms, this could be explanatory.
It doesn’t seem meaningful, but does appear in the data at http://www.bls.gov/bdm/table_g.txt
where the share of firms with > 500 employees increased from 1993 – 2009
Spencer and KH, to me the answer is obvious, churning, as I implied in my answer to KH on the other thread.
I don’t think it has ever been misunderstood that small businesses pay less and have higher risk of job loss. Those negatives are offset by the chance of the bigger pay off, and the abiltiy to get a job quickly/more easily when they are needed. Add to that the opportunity for part time, entry level and mobile employment and we see why they are quite often eagerly sought.
kharris,
I agree with you, which is why I didn’t call out the gross job creation figure at the same link. Small business are the largest driver of job creation, but they’re also the largest driver of job destruction.
Unfortunately, politically – and I say this of both Ds and Rs – they can rail on large businesses for the job destruction because when they announce layoffs the numbers are big, and trumpet small business job creation because who’s going to be envious of the CEO of an independently-owned bookstore.
For this reason alone, the narrative around small business as the key to economic growth is unlikely to change.
spencer-please see IRC Section(s) 531, 532, 535. These all deal with the accumulation of corporate earnings. Essentailly excess retained earnings are subject to additional taxes.
Essentially excess retained earnings is exactly what I was talking about when I said the IRS goes after people that are “blatently abusing” retained earnings to avoid taxes.
Surely some of the discrepancy (perhaps not all) would be explained by firms being counted as small one year and large in later years due to their own growth, or by merger and acquisition.
Example: A startup goes from 0 to 100 jobs in a year 1 and 2. In year 3, they get bought by one of the big firms but the number of jobs is unchanged (every worker keeps their job in the large company).
Wouldn’t the net job increase show up as an increase for small firms in years 1 and 2 with no net change (no job creation or destruction) in year 3?
But the total employment figures at the end of year 3 would show all the increase under the large firms.
I confess to not knowing the magnitudes of these flows or whether this is consistent with the BLS methodology. The key would be knowing how they treat small firms being acquired by large ones.
But isn’t it a plausible explanation for the discrepancy?
W Polley said: “But isn’t it a plausible explanation for the discrepancy?” I think your answer is a partial explanation, but I think its more likely that many small businesses go under annually. They then restart under a new name, and voila lost jobs and then new jobs. Of course some go under and never regroup.
Therefore, my comment re: churning.
***The point I made was that net employment is a very different matter than gross employment. Small firms go in and out of business faster than larger firms, so turn over employees faster.***
Exactly. Suppose some guy out on Old Stage Road hires a high school kid every year to help him out during sugaring season. He’s created a job. And suppose IBM hires an engineer over at their semi-conductor fab. They’ve created a job. But kid’s job lasted three weeks whereas the engineer’s job is ongoing. Fast forward ten years. Over those ten years, the guy with the sugarbush has created ten jobs. (all of which lasted only three weeks) whereas IBM has created only one. But only one of those eleven jobs is still around.
(And IBM is probably going to lay that engineer off and outsource the work to God knows where. But that’s a different story).
What we want to know is not how many jobs small business has created, it is what percentage of the extant jobs were created by large and small business. That’s an entirely different number.
Churning is a fact. No question. But churning explains the gross changes rather than the net changes, and does not by itself explain the discrepancy between the net flows and the comparison of the levels.
The data m.jed provided shows that small firms account for over 71 percent of gross job gains and a similar share of gross job losses. In terms of net change, small firms account for about 66.3 percent. That difference (71 versus 66) is due to churning–small firms closing and being replaced by new small firms. That does not answer spencer’s original question of the discrepancy between the net changes reference here and the comparision of levels at different points in time that he had in his original post.
To explain the difference between the net flows in different categories over time and the comparison of levels in different categories at different points in time, you need to know how they treat firms that change category between observations.
And if you’ll see my comment below, you’ll recognize that knowing the percentage of extand jobs created by large and small business is not a trivial question with an easy answer.
There are quite a number of people who are today employed by a large firm, but whose job was originally created by a small business. I don’t know the number, nor do I know how easy it would be to find that number. But I don’t think it’s a trivial number.
I talked to Charles Carlson — the Section Chief for Business Dynamics at BLS — about the conflict between the quote that small firms account for two-thirds of employment gains and their table
F that shows large firms account for most employment increases.
The claim that small firms account for two-thirds of employment account of net employment gains comes from the BLS employment dynamics models that track the history of individual firms across time.
This data shows that a few, rapidly growing firms account for much, if not all net employment gains, but the statement that it is small firms may not be quite accurate. For example if a firm starts out with six employees and grows at a constant 200% rate its employment will look like this:
year employees 1 6 2 12 3 24 4 48 5 96 6 192 7 384 8 768
1536
The convention in the employment dynamics methodology is to continue to label the firm according to the size of the firm when it first shows up in the data base.
So in the example the firm that first shows up with 6 employees at year one and grows employment at a rate of 200% annually by year 8 is no longer a small firm. But the convention in employment dynamics is to always count the firm they are tracking across time as a firm of the size that it was when it first appears in the database.So technically they call it a small firm, but after several years it would no longer be a small firm.For example, in the example the firm has 768 employees in year eight as compared to the cumulative total of 762 employees in years one through seven.
I also found other studies using the employment dynamics that discovered the bulk of employment is created by a small number of rapidly growing firms that quickly expand from small firms to large firms and continue to grow rapidly.
So the table that showed small firms accounting for two-thirds of employment growth was somewhat misleading. Yes, it generally is of firms that start small, bu they also rapidly become large firms. So the actual headline that small firms account for two-thirds of employment growth while technically correct, is misleading.
But I guess that is the difference between me and CoRev, I’m looking for the truth while Co
Rev just jumps on any supposed fact that supports his preconceived conclusions. I just can not help it if the facts just happen to have a liberal bias.
F
The example above is suppose to look like this.
The formating changed when I hit post.
year employees 1 6 2 12 3 24 4 48 5 96 6 192 7 384 8 768 9 1536
The example above is suppose to look like this.
the formating changed when i hit post.
year….employment
1……….6
2……….12
3……….24
4……….48
5……….96
6……….192
7………..384
8………..768
9………..1536
Is someone who buys a franchise from a larger company considered a “small buisness” or are they part of the larger company?
Also,
If a company large or small is based over seas, and only pays taxes for doing buisness within our borders, but has employees within our borders, are the employees counted in the post spreadsheets?
Are only the American employees counted, or do all the employees come into play since some are in the U.S.?
Also,
What about the situation where people have buisness’ and they only hire on a seasonal basis. Meaning….they are only open in summer, and everyone hired in May is guaranteed to be fired in October? How does that play?
Also,
What about when a small company is bought? The employee’s are not hired or fired? How does that play?
W Polley, please remember to what and who Spencer was reponding. It was my original comment on the other thread. Which was sole related to Gross jobs, IIRC I classed them as new jobs.
Spencer, just how many angels are we going to agree dance on that pin head? So, what’s your new number? Somewhat higher than your original I suspect. Pick one. I won’t quibble. But as we’ve heard today, this has been a teachable momemt. :-))
Retained earnings usually comes out of after tax profits.
If you own a small highly profitable firm you have an option. One, you can pay yourself a million dollar salary. The firm will count that as a tax exempt business expense and not have to pay taxes on it.You have to pay personal taxes on the million dollar salary. Or, you can pay yourself a $100,00 and count the other $900,000 as business profits. The firm will have to pay a business tax on the $900,00 –usually at a lower rate — and the remainder is now retained earnings. As long as the firm is growing and the retained earnings are reinvested within a reasonable time this is fine with the IRS.
But retained earnings is an after tax sum, and this is what all the arguments by the Republicans about low personal income tax rates encouraging business investment ignore. Any owner that takes a firms
profits out into their personal income, pay taxes on it and than reinvest the remainder in the firm is a fool and any accountant worth his salt will advise him to retain the earnings in the firm and reinvest it without paying personal income taxes on the money.
spencer,
That’s close to what I was suggesting. The methodology of keeping firms in the same category as where they first appeared makes some sense, but presumably this could be distorted somewhat by the choice of starting date. The data shown here goes back to 1992. A company that started in 1980 with 2 employees and grew to 1000 by 1990 would be considered large, if I understand you correctly. But a firm that started in 1994 with 2 employees and grew to 1000 by 2004 would be considered small. An odd convention, perhaps. But I don’t think they intentionally meant to mislead.
Of course, that sort of rapid growth doesn’t happen for more than a few years (once they have more than 1000 employees, I doubt that many have triple digit, even double digit, employment growth), so if the time period you’re measuring is short enough, this is less of an issue.
You did not address (because you had probably not seen my comment when you talked to your contact) my comment about acquisition of small companies by large ones. I suspect that’s also part of it, perhaps for similar reasons in the methodology.
I also suspect that the internal dynamics of a firm that grew from 2 employees to 500 in a decade would be very different from an established big firm like IBM or Ford. I suspect that a firm of 500 that was a firm of 2 only a few years before probably still behaves more like a “small” firm in a lot of ways. No hard evidence, just years of reading the business pages.
Spencer,
“But I guess that is the difference between me and CoRev, I’m looking for the truth while CoRev just jumps on any supposed fact that supports his preconceived conclusions. I just can not help it if the facts just happen to have a liberal bias.”
Funny……On one hand your telling him he is right, and proved it to yourself with your own facts, or least close enough to cut CoRev just a little slack, and call him a liar in the same sentence.
And you wonder why everyone is this country is worried about have Liberal Leadership? Amazing!
Spencer said: “ Yes, it generally is of firms that start small, bu they also rapidly become large firms.” And many start small and go under.
Do we now need to discuss the success rates for new start ups? Which by the way amounts to ~50% by the fifth year anniversary. Why not check with BLS and see what the graduation from small to large rate is?
Spencer, blanket statement like this: “ Any owner that takes a firms
profits out into their personal income, pay taxes on it and than reinvest the remainder in the firm is a fool and any accountant worth his salt will advise him to retain the earnings in the firm and reinvest it without paying personal income taxes on the money.” make little sense without some supporitng numbers. What percentage of profits is that owner taking? What is the age? Financial status? Investment strategies? Family status? And, any number of things that are required in that owner’s life.
Not a very good example or just to wide a blanket statement!
But how many small businesses are conducted as partnerships or sole propritorships, or subchapter S corps. In those cases the earnings fall thru to personal taxes. I will admit that operating as a partnership or a sole propritor is a foolish way to do business.
Spencers statement had a predicate that one wished to re-invest money in the business. That removes most of the concerns listed in the CoRevs post because the other uses are not re-investment in the business. So yes there are factors in the personal life that may affect the amount one wishes to re-invest, but the the question really on that amount one wishes to re-invest.
In addition re-investing at the corp level hopefully raises the value of the corp converting some of the retained earnings to capital gains.
***I don’t know the number, nor do I know how easy it would be to find that number. But I don’t think it’s a trivial number.***
Simplisticly, you could just subract the number of jobs the statistics gurus in their infinite wisdom have decided differentiates large and small businesses from the total number of employees in each large business. e.g. if MegaMonstroIndustries has 20,000 employees and the dividing line between big and small in MMIs line of business is 500, then MMI must have created 500 jobs when it was small and 19,500 since it got big. However, thanks to mergers and acquisitions, I doubt that is a remotely valid procedure.
***Tim — I believe you are wrong about retained earnings being taxed in the US.***
I think Tim is correct, and I’d give odds on his being right, but not long ones. I’m pretty sure that the situation used to be that most corporate earnings for C-Corporations (most big companies other than LLCs) are double taxed. The exceptions being earnings paid out as wages and benefits which are deductible expenses and capital investments which are taxed then (largely) recovered through depreciation taken in future years.
The excess retained earnings thing is an inducement to do something with the already taxed money retained by the corporation. Like pay it out in dividends, wages or something that will be taxed (again).
It’s possible that I had it wrong to begin with or that this was changed during the Bush years. But I don’t think so.
And, as always when I discuss accounting things. I am not, and would not want to be, an accountant.
CoRev,
Didn’t see the other thread. My day job is keeping me busy today. Apologies.
yep
All,
Uhm, isn’t 500 employees a mid sized company? I know not compared w/ P&G but there is a world of difference between a 75 person firm and a 400 person firm. I’d like to exclude companies under 10 employees and then look at job growth from like 11-75, 76-225, 226-350. I think that’d be much more informative then the propoganda about 70% new job growth coming from small biz.
Check out the Kaufman Foundation study:
http://www.kauffman.org/uploadedFiles/firm_formation_importance_of_startups.pdf
I am confused by the claim of 70% of new jobs comes from small business as well. It is not supported by the data.
In 2009 FICA income was $631b, SECA (small business) was only $39b. So small businesses contributed only 6% of SS income. That is too small to be the engine of growth that everyone makes it out to be.
run
if that yep is for kharris, help me understand how you compare productivity of apples per hour with productivity of buicks per hour without meansuring it by dollar value?
i agree about the labor being measured in hours and not dollars, although i can see why from the owners point of view, he might prefer to measure dollars of output per dollar of labor input.
codger
and i probably should not bite. but that double taxation is a bit of a red herring. the stock holder is not an “owner” in any moral sense of the word. he is an investor. should be nothing controversial about taxing earnings from investments…. and if the inflation rate bothers you, well you should figure that in when you are calculating your potential gains from investment.
as to the corporation itself, it is a creation of the government for reasons that the government deems in the interest of the general welfare. no reason not to tax it any way that seems easy to compute, and “fair” enough not to kill the golden goose. you are not paying taxes on your capital investments if you recover them through depreciation allowances. it’s just a way of accounting that allows you to spread out your tax break.
anyone who knows more than i do feel free to disagree with me on the details, but the moral case for “double taxation” is unconvincing.
just thinking out loud
suppose we have one large company with 1000 employees
and 1000 small companies with one employee each.
during the year LC hires 30 new workers
and the SC in aggregate hire 70 new workers.
and the same process goes on for a hundred years.
at the end of that time the LC has hired 3000 new workers and employs a total of 4000 employees
the SC in aggregate have hired 7000 new workers and employ 8000.
so we see that over time small companies have gone from 50% of the economy to 67%.
Is this the case? (and note our average SC now has 8 employees.)
We have an ap for that. It’s unit labor cost.
***Of course, that sort of rapid growth doesn’t happen for more than a few years (once they have more than 1000 employees, I doubt that many have triple digit, even double digit, employment growth)***
Triple digit? That’d be exponential growth with an exponent of 2 or more. Two people to 2048 in ten years seems not implausible at all. I think that Microsoft probably grew at triple digit rates for 12 or 13 years before leveling out in the late 1990s. Google has grown even more rapidly? Amazon? DEC in the 1970s? Wal Mart in the 1970s?
It’d be interesting to research this further. Should we be encouraging a handful of companies to grow and cutting them off when they stop growing? Strikes me as a policy that would lead to really weird dislocations. But it’s certainly a different approach to stimulating growth. (Would we really want Goldman-Sachs, Comcast, or BP to grow and grow and grow?)
However, employee compensation reduces a business’s taxable income, so if a business hires another employee, its taxable income is reduced with a corresponding reduction in taxes. It seems that a business would be silly to decide whether to hire another employee based on after-tax profits.
Don’t small companies have a pretty high failure rate? Isn’t the average lifespan about three or four years? Do the BLS numbers account for business failures and layoffs? They may create a lot of jobs, but the net overall growth may be smaller.