Big Job Creation By Small Business

Politicians talk about it. Business executives talk about it. The unemployed and underemployed certainly talk about it. What is it? It is job creation. And job creation typically comes from small, profitable companies.

According to the U.S. Small Business Administration, small businesses represent 99.7% of all employer firms. In other words, most companies are actually small companies. For your reference, technically a “small company” is 500 or fewer employees. Most small companies actually employ less than 50 employees.

Further, the Small Business Administration says that small companies employ just over half of all private sector jobs. They pay 44% of total U.S. private payroll, and have generated 64% of the new jobs over the past 15 years. Wow. Read that again, small, privately held companies have generated almost two thirds of the new jobs created over the last 15 years. Sounds like a good place to conduct your job search, doesn’t it?

Also, small companies create more than 50% of the non-farm private Gross Domestic Product. Small companies hire 40% of high tech workers such as scientists, engineers, and computer programmers. In other words, small companies create jobs at all levels of the employment spectrum.

Interestingly, 52% are home-based, with only 2% franchises. Small companies made up 97.3% of all identified exporters, and produced 30.2% of the known export value for a recent fiscal year. Keep in mind, these are the little guys, not the huge mega corporations.

Small companies produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited. (Source, the Office of Advocacy Research and Statistics.) This creativity produces opportunities for business expansion, and job growth.

An article in the Academy of Management, by researchers at UC Irvine, Clark University, and Stanford respectively, point out that “Jobs are created by births of new businesses, expansions of existing ones. Conversely jobs are destroyed by deaths and contractions of existing unprofitable businesses.”

Further, these researchers maintain “births of new business establishments, especially new firms, and expansion of existing ones . . . are the prime determinants of employment growth.”

To take the research and data to a higher level, we find that, according to a Kauffman Foundation study, “Job growth in the US is entirely driven by startups.” They say that new firms add an average of 3-million jobs in their first year, while older companies lost a million jobs annually – on average – not counting the last couple of years, where more were lost.

The Kauffman Foundation study further concluded, “When it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing.”

It’s well understood that existing companies of all sizes constantly create, and destroy jobs. But this Kauffman Foundation study found that net job growth occurs in the U.S. economy only through startups.

Most notably, during recessionary years job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

Wow. Job creation during a recession?

The conclusion, therefore, is that job growth could be boosted by supporting startup firms. And it is not just net job creation that startups dominate. While older firms lose more jobs than they create, those gross flows decline as firms age. On average, one-year-old firms create nearly one million jobs, while ten-year old firms generate 300,000. In fact, most of the job creation comes from firms that are less than five years of age.

One start-up software company executive, said: “We pay corporate income tax every year, the full 35%. So every month we are paying a check out to Uncle Sam for our corporate income taxes. Of course, we would love an elimination, but any reduction in corporate income tax would allow us to hold on to more of that capital. And with that capital we could use to fund more areas of our business, hire more people, invest more in our company – whatever it is to refuel that growth.”

So what conclusions can be drawn from these facts and statistics? When conducting your job search, you should probably focus much of your energy on the private sector, and particularly small and startup companies less than five years of age. That is where job creation occurs.