Thursday, November 15, 2012

Employment and Competitiveness of Small Businesses

During the presidential campaign there was a lot of talk about the role of small business in employment.  One of Romney's central theses was that the small business community is the largest creator of new jobs in the country and so we should give small businesses breaks to allow them to hire.

In actuality, small businesses may create new jobs but they aren't the largest employer in the country.  Large companies with more than 500 employees employ slightly more than half of all working Americans, while firms with fewer than 100 employees collectively employ about ~30% of the workforce.  Still, smaller firms are more labor intensive than large firms in that they spend a higher share of revenue on labor.   Mid sized firms employing between 10-100 workers spend over 20% of revenues on their workforce.  By contrast, large firms only spend 15%.  (I'd guess the reason 1-4 employee firms looks relatively low is that the majority of income is proprietor's income rather than payroll).

Source: Census Bureau

Even though they employ fewer people, there are many more small businesses in terms of number of firms.  However, since 1988 the average number of employees per firm has risen steadily (see below).  This implies that there's been consolidation in the economy and the average size of US businesses is increasing.  Today there are 5.7 million firms in the US, which is down 5% from the start of the recession.  By category, the number of businesses with 20-99 employees shrank the most over this time frame, falling by 11% since 2007.

One might wonder if the business landscape has trended towards consolidation because of the labor intensity of smaller firms. Larger firms have the resources to spend on technology and globalization of supply chain, which improves efficiency and allows bigger companies to take share from smaller ones.  One could probably argue in different directions as to the effect this has on the aggregate labor force, but the fact that large firms spend a smaller proportion of revenue on labor raises some underlying questions about the extent to which today's elevated unemployment is structural (vs. cyclical)--caused by the elimination of jobs through increased implementation of technology and business consolidation.

Source: Census Bureau

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