Do “small” businesses really create most US jobs?

If you had a dollar for every time a campaigning politician said that small businesses create most American jobs, you might have enough money to actually launch a small business. Politicians regularly claim that small businesses create between 60 and 80 percent of new jobs in this country. That particular political-economic axiom has become so entrenched in the national dialogue that it’s rarely challenged. But is the premise correct, are the numbers accurate, and do politicians really believe their own small-business rhetoric?

To start that discussion, you have to define “small.” It’s probably fair to say that, when politicians talk about “small businesses,” they’re hoping to conjure images of the kind of mom-and-pop shops idealized in movies from the 1940s and 50s. [Think of “It’s a Wonderful Life,” for example.] They would love for us to believe that corner markets, tiny family-run farms and one-or-two person home-office-based startups are the small businesses that they want to protect. Those are feel-good, sympathetic—but cynically created—images that perpetuate the idea that capitalism works for everyone and that government regulation of the “little guy” is what is killing American jobs.

Unfortunately, the facts of American economic life add up to a very different bottom line. First, that vaunted, sepia-toned image of small business is a distortion. The government agency charged with guaranteeing loans for “small” businesses—the inaccurately named Small Business Administration—defines a “small” business as one with fewer than 500 employees That’s not exactly your average, garage-based tech start up.

In addition, says economist Jared Bernstein, “although most companies are small—according to 2008 census data, 61 percent are small businesses with fewer than four workers—more than two-thirds of the American work force is employed by companies with more than 100 workers.  You can tweak the definitions, but even if you define small as fewer than 500 people…you still find that half the work force is employed by large businesses.”

If you redefine “small,” you get another result. For example, according to a recent article in the Wall Street Journal:

The European Union defines small- and medium-size enterprises as those with fewer than 250 employees. Small businesses, a subcategory, have fewer than 50 employees, according to European Commission spokesman Andrea Maresi. Define small businesses that way, and they created 32% of net new U.S. jobs since September 1992, when collection of such data began.

And, according to the Wall Street Journal’s analysis,

“Beneath the 65% figure cited by the SBA is a lot more job creation and destruction than is immediately evident. Businesses with fewer than 500 employees accounted for about three of four jobs created since 1992, according to a paper from the Federal Reserve Bank of St. Louis published in April.  But many don’t last long. For instance, employers with fewer than four workers have accounted for roughly 5% of all private-sector workers since 1992, but 15% of all job creation and 15% of job destruction in the private sector in that period.

“But don’t small businesses at least fuel job growth,” asks Jared Bernstein in a recent New York Times Op-Ed. Answering his own question, Bernstein says:

 Sort of. It’s not small businesses that matter; but new businesses, which, by definition create new jobs. Real job creation, though, doesn’t kick in until those small businesses survive and grow into larger corporations. In fact, according to path-breaking work by the economist John C. Haltiwanger and his colleagues, once they accounted for outsize contributions by new and young companies, they found ‘no systemic relationship’ between net job growth and company size.

So, is all the rhetoric about promoting and protecting small businesses just a giant political hoax?  Not completely, if we believe the economists who say that small businesses that evolve into big businesses contribute to job creation. It’s also clear, though, that politicians use “small” in a calculated, deceptive way to give their words a populist ring. But bottom line, politicians probably aren’t really looking out for the mom-and-pop businesses they pretend to defend, because they don’t get big-buck, Citizens United campaign contributions from those little guys.