Tuesday, January 27, 2015

Size Matters in Employment

It is always fun to check on the recent validity of eternal truths. For example, I was shocked to learn one day that if a tree fell in the forest you could not hear it if you were talking on your cell phone. I was also surprised to learn that JD is not an elixir and will not prolong my life past 100 years.

So I decided to check up on another truth – that small businesses are responsible for all or most new jobs in America. I hear people make that claim all the time. For example, I was having a JD on ice at a local tiki bar when the lady sitting next to me whispered in my ear – hey fella what do you think about the proper size of an NFL football? Not knowing the correct answer I whispered back – most jobs in the US are created by small businesses. She toddled off shortly thereafter.

Now that I have your attention, I can move ahead. Who really cares whether jobs are created by your local dry cleaner or by Amazon.com? A job is a job. In fact the job at Amazon probably has better benefits and security. I know that some of you think that bigness creates meanness and that AT&T and GM have it in for workers. But those of you who think that way probably never had a job at one of these small companies. I recall one summer working for a landscaper who yelled at me when I accidently almost cut my arm off with his power saw.  I am not sure if the guy was ever sober one time we worked together.

My point  today, however, is not to irritate small business or to argue with the zillions of fine people who believe that small businesses were invented by God and are the sole source of all good things including JD. My goal in writing this blog post is simply to look at some data that measure recent job change in the USA by size of company. And doing that I have to admit was almost as fun as teaching a three hour class at 9 am  at Big Arts.

Below is a table of numbers I constructed after visiting the Bureau of Labor Statistics web page (http://www.bls.gov/news.release/cewbd.t04.htm ). I take no responsibility for the definition of small or large or what is in between. I will also refrain from any jokes about the meaning of small or large since I know that my readership is above such things. But I do recall a joke about relativity and women’s technical skills in which a man holds his fingers one inch apart and explains to the woman that the distance between those two fingers is exactly six inches.

The BLS has decided to divide private sector companies into three size groups – 49 or less employees; 50-249 employees; and 250 or more employees. They published data for each size cohort for the years 2004 to 2013. Their data is by quarter so I added the quarters to get yearly totals. Their data set has employment gains and losses for each quarter for each size cohort. I have netted the losses from the gains to get the net increase or decrease in each year for each size cohort.

The numbers are pretty interesting. The first set of sums in the table below show how many jobs were created in those 10 years. Below the sums are the averages per year. Roughly 330,000 jobs were created each year. Small companies created 103,000 per year (31%); Medium firms 171,000 per year (52%) ; large companies 55,000 per year (17%).

So you might conclude from these past 10 years that small companies were responsible for about a third of the net jobs created in private companies. That is a nice hunk of jobs buy clearly is nowhere near even a majority.

But let’s take this another step. The years 2008 and 2009 were unusual. While large companies typically account for a minority of the jobs gained in expansionary years notice that the larger companies accounted for nearly 7 million job reductions in 2008 and 2009. Small business lost less than half that amount. So let’s remove those two years and look at the 8 remaining years in which there were net job gains. If we believe those 8 years are more typical for accessing job gains – then the picture changes radically. The average increased employment of the larger firms was about 927,000 jobs per year. Small firms accounted for about 563,000 jobs per year.

Whoa Nellie you say. Larry – you can’t throw out the numbers you don’t like. That’s true. But it is also true that neither set of averages is perfect. Leaving in two very atypical years distorts our conclusions. Removing those two years equally taints the data. Without any easy or obvious third way, I think it is safe to say that both sets of data inform us. Weighing both together suggests that we not discriminate against the bigger firms when it comes to finding ways to expand US employment. It just ain’t true that small firms are the only sources of job growth.

Table. Net Job Change Private Sector Companies
2004 to 2013 by Size of Company
Thousands of jobs

0 to 49
50 to 249


  1. I read the data a little differently. The creation trend or rate for for large and small was larger than the middle size. How many new small businesses were started? How many large businesses were expanded and by how much? How many small businesses made the jump into middle size businesses. In essence what was the cross movement of each type and what effect did this have on job creation.

    What level were these jobs that were created in each division of businesses? Entry? IT? labor? Management? The answer to this question determines if the created jobs created more net income and was that "more" higher than the flat average we have seen for almost 15 years.

    1. James, I am glad my post could inspire so many good questions. But alas, one blog post can only do so much. You have enough questions for me to write three PhD dissertations! I stick with my main conclusion. Large companies create jobs. I will say one more thing based on an article I saw in the WSJ. Many jobs are being lost today in two sectors -- health care and financial services. Hmmm, I wonder what could be behind that?

  2. Would percentage increase/decrease not be more telling as to the impact of each sector rather than sums and averages? Granted that large companies can create "more jobs," during an economic expansion, but their percentage increase might be less than a small company which may be taking advantage of the expanding economy to, as James says, move into the next size category. The old "marginal returns" thingy.

    BTW, der Adler would jump down your larrynx if he saw you use using the term "workers." Also, drink enough JD and you just might preserve your body to well past 100......just don't walk near any open flames.

    1. Fuzzy, I stand guilty and Prof Adler would skewer me in front of the Rambling Wreck. Employees!

      The problem with percentage changes comes in picking beginning and ending points. Those have disproportionate impacts on your conclusion. In this case with these years I thought the averages would be better. Look at 2004 to 2013. While those years seems legitimate -- it seems to me you get a weird conclusion.

  3. Larry,
    Good data in your blog. The stratified data provides good insight into the employment picture. I agree with your two conclusions: ALL jobs are not created by small businesses and we should not discriminate against Big Business.
    However, this data alone is not sufficient to make Good Government policy. Additional information to consider: SBA classifies Small Business as businesses with less than 500 employees. This may seem strange, but it is true. The data chart category of 250+ employees includes both small and Big Business employment figures (based on SBA definition). Disregarding this definition difference: Employment reported in the two categories (of employees with less than 250 employees) accounts for over 50% of job growth. This is not all, but it is an important figure. Government policy and Government Regulation would serve the nation better to have policy that makes it easier to start new companies and have policies and regulation that made it easier for these start-ups to survive and grow into medium size companies. The trend line for new businesses entering into the market place has been declining since 1978. Firms exiting the market place have been relatively flat with a slight spike beginning in 2008. Since 2008, more entrepreneurial companies have exited the market place than joined the economy. Government policy and regulation needs to be more Small Business friendly.
    Big businesses (business with 500+ employees) usually have a seat at the table when new regulation and policy is formulated by any Administration. The cost of compliance is usually something the Big Business can manage, but places a big burden on the smaller competitors and start-ups.

    1. Hi Danny. You must be the Paul Krugman of small business! :-) There is no place in the world where it is easier to start a small business. Ask the Greeks or the French or the Italians. Yet they fail. In fact most small entrepreneurial companies fail. Why -- probably because it is so easy to start one. People with half-baked ideas put together some capital and build a lemon-aid stand in Minnesota in the winter. oops. Furthermore, ask any small business owner -- it is a very difficult thing to do. And much of the difficulty comes from complying with stacks of government regulations -- many there supposedly to protect the very same companies. Have you heard of the SBA? The Chamber of Commerce? There are ubiquitous resources at Federal, State, and Local areas for start-ups and they still fail. Anyway, my main point is that large companies add to job creation. I wish the government would get out of the way of small and large companies so they could hire even more workers.

  4. Hi Larry, I will ignore the first sentence of your response. We agree that this is the greatest country in the world to start up a new business.Yes, most new businesses fail. Usually because of insufficient operating capital to survive the 1st Year and then the first 5 years. But the intersecting trend lines (of new companies entering and companies exiting the economy) might indicate something has changed over the past 40 years. I think that "something" is increased bureaucratic paperwork, increased Big Government regulation, and tighter credit for small business (operating lines of credit). Due to the normal high failure rates, the number of start-ups needs to be higher to insure the growth and expansion of small business into medium and large business.

    1. Interesting Catch 22. It is government intervention that inhibits small business yet you want more government intervention to promote small business creation. Are you sure you trust Major Major to get the job done right?

  5. I guess my ability to communicate my position with you has failed, terribly. My point has been that too much Government Intervention (Via policy and regulation) has hurt small and medium size business in a greater proportion than Big Business. I have not and do not propose more regulation on big business, but smarter and less regulation on all business.
    I would just encourage Big Gov to back off and just let the Free Market Capitalist system work.

    1. Danny,

      Yes, less is more! I re-read your first reply and it says something like policy should make it easier for small companies to form and survive. I took you to mean new policies were needed to accomplish this. Perhaps you meant taking away policies would help more companies to form and survive. That would be compatible with more market and less government regulation.

  6. HMMM! Seems to be a lively crowd. Yes Dr. Adler yelped at me once for mentioning the word worker.

    Small versus big. I go back to my questions. Creating jobs is part of but only part of creating jobs that create better income. If all we do is add low level jobs both in small and large businesses then then the only thing that has changed is to get those employees off of unemployment and into the workforce. Is this not just a transfer of who pays the employee where based on taxes the employee pays a little back to the government and that source comes from the private sector.who bought the product or service that supported the new job.

    1. If I read you right Jim, you are suggesting an equivalency between unemployment and low paid actual jobs. The folks get paid either way -- just a question who pays them. Wow. I hope that isn't true. And I doubt Dr. Adler would either. Unemployment is acceptable for many situations but as a permanent alternative to low paid employment, I hope it never gets that way. I had many low paid jobs in my life and I was lucky to get the pay and the experience. Being unemployed would have been disastrous for me.

  7. This comment is from Charles....

    Dear LSD. Verwerry, verwerry good stuff ‘bout who creates yobs . . . the big guys or little. I wuz in the latter camp until I read . . . . in Bloomberg/BizWeek that at a minimum casts doubt on the small fry's efficacy to create yobs vs. larger frys. Those references are more “edukated” and have obviously dun more research on the subject than I. But, I offer my own perspective from 25 years direct experience with the small fry (exclusively manufacturers) and direct research thereof.

    We can quibble about what size qualifies for small fry—SBA typically limits to 500 employees—so let’s just set that amount as the bar. Further, my comments are limited to manufacturing only.

    My take-a-way from experience/research is that most small fry—again mfgrs.—while having started a business are not positioned to expand/grow/add employees due to self-inflicted barriers—insufficient capitalization, poor cash/cash flow management, lack of investment in research pertaining to costs, margins, customers, competitors, and target markets. Some former blogs mentions that small fry equally create yobs and destroy yobs. That is understandable given my findings—they simply don’t have the resources—financial, human, and knowledge—to grow and add yobs. Yep, they create yobs at the git-go but fail in the stretch.

    Given that most companies don’t start out with 500+ employees, they’ve got to start small then grow. But, as I’ve said, most face formidable barriers to grow—to add employees—and only the strong (better positioned) survive. Darwin at work, here?

    I’ve not addressed the range of type of companies—only mfgrs. Yes, many other types of companies start up—pet shops, dry cleaners, auto repair, etc.—and high-tech. Seems the latter have the best chance to get VC funding, etc. to grow commensurate with yobs-of-the-future and (hey, require up-to-date edukation in writing, wreading, and writhmatec—to quality for those yobs) and to be positioned to add employees = growth.

    You’ve blogged ‘bout good-paying yobs. Shure, small frys can create yobs but are those yobs the ones that will buttress the middle class? Only the strong survive and will be able to answer that question.
    Maybe rather than debate which creates more yobs—smaller vs. larger—we shud debate how to create good-paying yobs of the future.

    1. Thanks Charles -- sorry the system wasn't working for you. It mystifies me too! Good points about employment -- I like the last one best. Let's not let policy worry about whether to promote jobs at small or large companies. Let's just find ways to best improve employment and earnings period.