Job Creator Myth #4: Small businesses and what really threatens them

Spoiler alert: It’s not red tape. It’s big businesses and globalization.

The definition of “small business” varies. The US govt provides you with a series of worksheets to calculate whether you are in fact a small business. I’ll be using this definition:

The most widely used, and SBA-endorsed, sizing criteria for small businesses is the following – the business must have no more than 500 employees for most manufacturing and mining industries, and no more than $7 million in average annual receipts for most nonmanufacturing industries.

Why it matters?

This week the RNC is flooding the airwaves with their vision of a “we built this ourselves” society, full of hardy self-made men hacking their way through legal red tape to put a cosy business on every street corner in Heartland, USA.

This image of America and many of the assumptions upon which it draws is a myth. Here are some facts about small businesses.

In what sectors do you find small businesses?

When I looked at this data from the Bureau of Labor Statistics, it surprised me that only retail trade and services fit the mold of what I and most people think about when we hear the phrase “small business”. A third of these workers are employed by companies and sectors that would be indistinguishable from the big corporation world to you, unless you were an accountant:

To clarify: That “percent employment in the industry” is the percent of workers in that industry that work for businesses with less than 100 employees. This next table is more in line with the kinds of mom & pop start up small businesses and corner diners that we should be thinking about fostering:

In 1992, 58 percent of all businesses in American employed fewer than 5 employees. This was only 7% of the total workforce. Adding slightly larger small businesses (up to 9 workers) captures 16% of the 1992 workforce. Fast forward to 2010, and you’ll see that there is something important happening to small businesses:

I wished they were tracking this for firms with less than 20 employees, because these are the businesses that really matter to job growth in our economy.

Some better facts to put in your noggin:

Wealth and Power concentration in few companies

  • 2 percent of businesses employed 39 million (44%) of the US workforce (1992)
  • In 1992, 98 percent of businesses had less than 100 employees and employeed 48 million (54%) of the US workforce.
  • From 2010 census, 98.25% of businesses have fewer than 100 employees.
  • 80% of U.S. small companies that remained in business from 2000 to 2003—the most recent period for which Hurst and Pugsley compiled data—didn’t add a single employee.
  • 99.7% of businesses have less than 500 employees, and would be by the government’s definition, small.

In case you didn’t catch that: Every time you hear a job creator talk about small businesses, they are referring to 99.7% of all businesses!

Unfortunately, these 99.7% of businesses only employ half the workforce. The other half are employed by mega corporations (0.3% of all businesses) that wield unparalleled political power because of the tens of millions of lives that depend on them.

But the real stink is that <500 employee definition of “small business” mixes legitimate start ups with decades-old rather larger companies that are no longer trying to do right to their own workforce. Read below about how salaries change with business size.

Small businesses do create jobs at at faster rate than mega corporations

Without small businesses, the economy doesn’t add jobs very quickly, and in the last 10 years, small businesses have been unable to add new jobs:

The job creator myth is caused by leaders talking about one kind of small business and meaning another:

If really small businesses (less than 10, 50, or 100 employees) are the engine of the recovery, and the government no longer tracks these groups separately, they start to adopt more expensive legislation to help all businesses with less than 500 employees. This is actually a terrible policy, since there are medium sized small businesses that seem to be treating the American worker worse than small businesses do:

This is a chart I compiled from Bureau of Labor Statistics data. The R-squared is nearly zero, meaning that there is no linear relationship between business size and salary they pay out per employee. However, you can see for yourself that there is an odd bubble with businesses that employee 5-20 employees each, and then it drops for the 100-750 employee range, then bumps up against at 1000 employees and up.

Also note that nobody is getting paid enough to live on – the median household income is higher because everybody is working.

My speculation for the nonlinear relationship between business size and employee earnings is that small business owners have to look their employees in the eye. They know their workers, and they do right by them. After a business gets to 150 employees (As Malcolm Gladwell explains in the Tipping Point), social dynamics change. The businesses treat workers worse, until they get big enough to attract union organizers, at somewhere around 1000 employees. Many of the big businesses are universities, school districts, police departments, and state governments, in addition to insurance companies. 37% of public institutions are unionized, compared with 6.7% of private companies.

The unexpected sweet spot for employees is working for a business with 500-750 employees, but the worse spot is working for that same business when it only has between 20 and 500 employees.

Good small business climate: 1 to 19 employees.

Bad small business climate: 20 to 499 employees.

Best employee business climate: 500 to 749 employees.

Crazy, huh? Well that’s ten times more substance than you’ll hear from the windbags in Tampa at the RNC. Many of those same windbags are first in line for the “build this for me” Federal subsidy economy that they rail against:

Red states gobble up more federal tax money than they pay out in taxes:

If you click the map and drill down, you’ll see that this is really about city voters subsidizing rural citizens all across the USA, who tend to vote Republican 60%-to-40$%. Texas is one of three red states that doesn’t suck down more than it pays into the Federal government. New Mexico and West Virginia are the two blue states that depend the most on Federal welfare.

So if there was one question that we should keep asking, it is why small businesses have failed to hire more new employees in the last 10 years. It is a trend to continues to decline, even though the number of new businesses started has remained steady over that time frame. I suspect it has a bit to do with globalization, and the monopolization of federal pork into the hands of the largest companies, the 30% increase in healthcare costs over that decade, and a bit about peak oil, but except for the healthcare part, I can’t prove all of that.

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