New Small Business: Economic Development Catalyst

Small businesses are the backbone of the U.S. economy. This is a statement that is tossed out for public consumption on a fairly regular basis. What data backs it up? What might it mean for job creation and other key indicators of economic health that matter to the general population? In the November 2012 Business Dynamics Statistics monthly report from the Census Bureau, it was noted that hiring and job creation in small businesses (19 employees or less) with two years or less of operations was stronger than in larger companies that had been around longer.

While older firms only hire 25-33% of new employees for newly created jobs, young firms average about two in five (40%)! A substantial fraction of the job creation for young firms is due to the job creation that occurs in the quarter of starting up. However, there is substantial subsequent job creation as well as job destruction in the succeeding quarters in the first two years. The overall net job creation (the difference between job creation and destruction) is much higher for young firms than for older firms.

Small Business strengthThe other area in which startups excel is in worker churning (hiring in excess of job creation and the separations in excess of job destruction.) Job creation measures the employment gains from the expansion of existing establishments and the creation of new establishments. Job destruction measures the employment losses from contracting and closing establishments. The Department of Labor maintains that churning helps the matching of workers to jobs. Hiring and separation rates at young firms are seen as being unusually high. There is also a trend of a marked improvement in hiring and job creation in young firms since 2008 in comparison to established firms. 

The report, entitled “Job Creation, Worker Churning, and Wages at Young Businesses,” draws its conclusions from the U.S. Census Bureau’s Quarterly Workforce Indicators, which use federal and state administrative data on employers and employees combined with core Census Bureau data. On a less rosy note for employees in small companies, the study also showed that their earnings per worker are lower than at more mature firms. Since the wage premium for workers who choose to work for large companies has persisted, earnings growth–even during the most recent recession–is largely attributable to wages paid by larger companies. Some of this decline is accounted for by changes in the industry  composition of startups over the last decade, but the overall trend is downward.

Just before the 2001 recession, workers at new firms earned about 85 percent as much as workers at mature firms. By 2011, this earnings ratio had dropped to 70 percent. The earnings premium associated with working for a large employer versus a smaller employer also grew during this time period: Average real monthly earnings in small firms fell from a high of 78 percent in 2001 to a low of 66 percent in 2011. 

Churning rates are said to be “procyclical,” dropping during recessions as firms become cautious about hiring, and employees, with fewer jobs available, stay where they are. In both the 2001 and, especially, 2007-2009 recessions, worker turnover rates declined, but failed to recover to their previous peak after the recession ended. Churn rates for the youngest businesses recovered modestly after the most recent recession, but dropped slightly after first quarter 2011, perhaps reflecting eroding worker and business confidence, the study said.

What does this all mean? Here are the key takeaways:

  • Small businesses create more new jobs than large businesses
  • Pay at small companies tends to be less than at larger ones
  • Turnover is higher at smaller firms than at larger ones
  • Small business bounces back faster than big business after a recession
  • Startups are paying less now than they were a decade ago

 

 

 

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