When Starbucks rolled out its philanthropic "Create Jobs for USA" campaign, it was more than obvious to CEO Howard Schultz why it was important to seek out customer donations to support small-business lending. Small business, he told The Daily Beast, is "the lifeblood of job creation in America."
The idea that small business spurs job growth is a powerful, if not biblical, force in economic theory and public policy. At the signing of the Small Business Jobs Act of 2010, a bill authorizing loan guarantees, tax cuts and new funding sources for the nation's small proprietorships (including an ill-fated $30 billion loan program involving community banks), President Obama proclaimed that "small businesses produce most of the new jobs in this country. They are the anchors of our Main Streets."
But what if this bedrock belief about the jobs-creating power of small business isn't true — or, at the very least, is missing a big part of the story?
Some economists have unleashed controversial, but persuasive, new research that challenges the conventional wisdom, and even shows how blanket support of small-business subsidization would pose obstacles to an economic recovery.
In a paper published last fall, a team led by Erik Hurst, an economics professor at the University of Chicago's Booth School of Business, found that a preponderance of small businesses actually had little growth in employment once they were established. What's more, the businesses considered in the study-mainly the sole proprietorships of craftsmen, professionals, doctors and shopkeepers-were run by owners with no plans to introduce new products or services that would necessitate payroll expansions.
"We find that most small businesses have little desire to grow big or to innovate in any observable way," the report noted. "The typical small-business owner is often very different than the entrepreneur that economic models and policy makers have in mind."
The study found that between 2000 and 2003, nearly 80 percent of small firms (those with fewer than 20 employees) added no workers to their payroll. Even when isolating the sample to newer firms (which have a higher propensity for growth than longer-standing small businesses), only 28 percent added workers.
The study also noted a Kauffman Foundation survey which found that even among small business startups, which are the firms most likely to add workers, only 42 percent actually added employees from 2004 to 2008. Of those reporting additional employees, 90 percent added fewer than five.
"It is the new firms that contribute, on average, to job growth," the authors of the Hurst-led study observed. "Yet, as we have just shown, this is rare for the typical small businesses. While much employment growth is due to new firms, it is not true that most new businesses generate employment growth."
"On the margins, small business probably doesn't account for a lot of the net new jobs that are created," said Robert Litan, vice president of research and policy at Kauffman. "But forget about small vs. big. If you look at the businesses by when they were formed, then all job creation until the recession was found was in businesses under five years old."
The idea that age, not size, determines hiring activity is backed up by a paper published in 2010 by the National Bureau of Economic Research. The paper, entitled "Who Creates Jobs? Small vs. Large vs. Young," noted that small businesses lost 1 million jobs in 2005, partially offsetting a spurt of 3.5 million new jobs created by startups.
"There is no systematic relationship between firm size and growth," wrote economists John C. Haltiwanger, Ron S. Jarmin and Javier Miranda.
The implication is that the true engine of job growth is not small business, per se, but startup businesses. If that's the case, then the political pressure on banks to facilitate job creation by making small-business loans is misdirected.
"I don't see banks doing venture funding," Litan says.
