The Economist: Small Businesses: Big Impact
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Dr. M. Ray PerrymanSeptember 29, 2011 | 1,784 views | 1 comment
Small businesses have long been an important source of economic activity and employment, particularly in certain industries such as real estate and construction. Of total 2008 employment in Texas of 9.2 million, almost 1.5 million jobs were within firms with less than 20 employees (according to data compiled by the US Small Business Administration--SBA). Another 2.8 million fell in companies with between 20 and 499 workers. The small (less than 500 employee) companies accounted for almost 46% of private-sector jobs in Texas.
In terms of numbers, the vast majority of companies in the state are very small. There were 391,010 firms with fewer than 500 workers, 342,500 of them employing less than 20 people. By contrast, there were only 5,402 large employers (500+) according to the SBA’s most recent data available for the state (2008). (There are also more than 1.8 million companies with no employees.)
Looking at the data by industry, the largest numbers of small (less than 20 employee) companies fall into the professional, scientific, and technical services; retail trade; health care and social assistance; other services; and construction segments. Not surprisingly, some industries have relatively few small firms given considerations such as capital investments.
The recent national downturn affected businesses of every size category. Across the United States, companies began to shed jobs beginning in approximately 2007. According to data maintained by the US Bureau of Labor Statistics, the net change in total private-sector employment dipped to the negative in the third quarter of 2007, with a one-quarter uptick in the fourth quarter of that year. During 2008 and 2009, losses mounted, and it wasn’t until the second quarter of 2010 that net job gains were realized.
Looking at the patterns by firm size, firms with fewer than 50 employees began to experience net job losses slightly sooner and were losing almost as many jobs (on a net basis) across the nation as large firms during the worst of the recession. During the first quarter of overall improvement in jobs, employment in these firms grew by more than other size groups, with net gains of 237,000 (compared to 217,000 in companies with 50-249 employees and 234,000 in firms with 250 or more).
In addition, small firms tend to be more fluid, with jobs added and lost at a much greater rate than in larger size classes. For example, in the fourth quarter of 2010, firms with fewer than 50 employees saw gross job gains of 2,996,000 and gross job losses of 2,951,000 for a net increase of 45,000. Companies with 250 or more employees, by contrast, gained 1,706,000 jobs and lost 1,355,000 jobs (for a net gain of 351,000).
Since the recession, small businesses have been less of a driver of job gains than they had been in some recovery periods. Continued uncertainty plagues many firm owners, with prices shifting rapidly and health care costs a concern. Political brinksmanship with regard to the debt ceiling debate also has small firm owners holding back from commitments to new employees, and credit availability remains a major concern.
As the pace of economic growth continues to lag, it is becoming increasingly apparent that encouraging growth in small businesses can be an important component of overall improvement. As long as business owners’ concerns outweigh their optimism that improved business conditions are here to stay, they will keep a damper on the pace of growth.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.