Small, New Businesses Trump Big Business When it Comes to New Jobs Created

by Taylor B. James, Economics Intern

It is undeniable that two of the main pillars of our economy are big and small businesses. Fortune 500 CEO’s might argue that big businesses are the driving force of our economy, others that small businesses are. Both are important: Corporations generate 58% of profits in the economy; small businesses, however, create more jobs. Startups, specifically, create the jobs needed to keep the economy growing.

First, let’s take a look at the economy as a whole – where the jobs are coming from and where they are disappearing. In 2009-2010, there was a net 2.5 million payroll jobs lost in the U.S.  This is an alarming figure to say the least, though it pales in comparison to the previous year, when 6.4 million payroll jobs disappeared from the economy from March 2008 to March 2009.

Of the 2.5 million payroll jobs lost between March 2009 and March 2010, approximately 1.7 million occurred in businesses with over 500 employees, 67% of the total jobs lost. As a matter of fact, only one size of small business experienced positive job growth in 2009-2010, those with 1 to 4 employees.

Job growth/loss data for the United States by firm size are as follows:

Employment Change Table

As the table shows, firms sized 1 to 4 employees experienced net payroll job of growth of 582,358 from 2009-2010 (reported as of March 12th). These small firms are what we can count on to fuel our economy and lead the economy overall to net job creation.

During the 2008-2009 recession, the economy suffered roughly a net loss of 8 million payroll jobs (from Dec 2007 to June 2009). Countering this, firms sized 1-4 accounted for 425K in positive job creation. Since the end of the recession in 2009, job growth in the economy has resumed, though new data via the Statistics of U.S. Businesses is not available to determine what size firms are creating these jobs.

It is vital to our economy for us to emphasize the importance of small businesses and encourage the formation of new companies. As the Statistics of U.S. Businesses data has shown, only firms with 1-4 employees were able to combat the 2.5 million jobs lost in 2010. Further examination of the Business Dynamics Statistics, shows that of these businesses, the most contributory to job creation are those within their first year of operation, as the following graph illustrates:

Job Creation Graph

As the data shows, firms less than a year old created the only positive job growth on average, from 2003 to 2011. Furthermore, these firms outperformed all other age businesses, creating just under 3 million jobs per year, on average, whereas the older firms incurred net job destruction.

Regardless of where the jobs as a whole are coming from now, one thing is apparent: even through recessions, we can rely on startups to generate job growth and continue to be a driving force in our economy. For this reason, among others, we must do all that is in our power to encourage and increase the formation of startups in our economy.

Taylor B. James is an economics intern with Econosystems in Menlo Park, California.  He will be attending U.C. Berkeley in Fall 2013.

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About Anne Ramstetter Wenzel

Economist & Market Researcher, Certified Business Advisor for the Silicon Valley Small Business Development Center.
This entry was posted in Life as an Entrepreneur, The National Economy, Uncategorized and tagged , , , . Bookmark the permalink.

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