With unemployment stuck above 7 percent, policymakers have been searching anxiously for ways to put more people back to work. However, the first step in that process may be the most complex — simply identifying which type of business actually creates jobs.
Commonly, the argument boils down to three groups: start-ups, small businesses and large corporations, each of which has unique policy interests in Washington.
Most likely, it will take a joint effort, but researchers and economists have starkly different views on which group should take priority as the administration and lawmakers try to jumpstart the labor market.
Here are some of the basic arguments for championing the interests of each sector, as well as the prevailing skepticism about each one’s potential to lead the recovery.
Small businesses: The backbone of the economy?
President Obama has used that line on several occasions to describe the importance of small businesses, as have scores of other politicians. In support of that title, many have cited studies from the U.S. Small Business Administration that show small firms employ just over half of the private-sector workforce and created nearly two-thirds of nation’s net new jobs over the past decade and a half.
However, the definition of “small business” provides important context for those statistics. The SBA considers firms with fewer than 500 employees small, placing nearly every business in the country (99.7 percent of firms that have employees) under that umbrella term — thus, it is no surprise they employ the most workers.
A more strict definition of small business, using a limit of 50 employees, would still include the vast majority of the country’s businesses, but it would trim their share of the workforce to less than a third.
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Furthermore, employing a large number of workers doesn’t necessarily translate into creating a large number of new jobs. A study by the Kauffman Foundation, an entrepreneurship research organization, showed that existing firms actually lost about a million more jobs than they added every year between 1977 and 2005.
That’s largely because most employers aren’t interested in growing past a certain point. Only one in four small business owners are interested in expanding their company, according to research at the University of Chicago; once they reach a certain size, the best case scenario for most is that they simply hold steady.
But those that are hiring are helping, creating 8.7 million jobs between March 2011 and March 2012, and some believe policymakers should simply help more firms join that small group of expanders. In a column last week, SBA Administrator Karen Mills argued that “while start-ups receive a great deal of attention, there is another segment of businesses that can fuel economic growth—existing establishments.”
Moreover, adding new positions isn’t the only way existing small businesses create jobs, according to Bill Dunkelberg, chief economist for the National Federation of Independent Business. It also happens when they bring back workers they let go during tough times.
“The jobs problem we face today, in fact, is that employment is below capacity in existing firms,” Dunkelberg wrote earlier this month, noting that many of the 8 million workers who lost their jobs during the recession were employed by small businesses. “Public policy should focus on what might be done to spur those firms to re-employ workers who had jobs at the peak of the expansion.”
Small business lobbyists have asked lawmakers to support proposals to lower individual tax rates across the board, eliminate time-consuming regulations, bring down the cost of health care and stop borrowing rates from surging — each of which, they say, forces employers to pull back on investing capital back into their firms.
At the same time, overall economic uncertainty and weak sales have been cited as a major concern ever since the recession, and small business owners have urged elected officials to take any and all steps to put more money back in the hands of their customers.
New businesses: Not enough start-up support?
A growing contingency of economists believe start-ups are the most reliable job creators, pointing to studies that show new firms are responsible for nearly all of the nation’s net job growth every year (total job gains minus total job losses). In fact, the National Bureau of Economic Research has shown that, when controlled for company age, there is actually “no systematic relationship” between firm size and job growth.
Meanwhile, hiring by new firms remains fairly constant during times of economic growth and decline, while hiring by existing firms ebbs and flows with each cycle.
Citing those studies, start-up advocacy groups have urged lawmakers to throw all their support behind proposals that make it easier for entrepreneurs to start new ventures and create new jobs.