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Small businesses and the bottom line By: John Maggs December 1, 2010 04:55 AM EST
Republicans and Democrats do seem to agree on at least one thing these days: Small businesses are the engine of job creation.
Small businesses with fewer than 500 employees provide 70 percent of our nation’s jobs and are the “heartbeat of innovation and productivity in America,” said House Minority Whip Eric Cantor (R-Va.).
President Barack Obama concurs. At an event celebrating his commitment of $30 billion to subsidize bank lending to small businesses, the president said: “This is an issue of putting our government on the side of small-business owners who create most of the jobs in this country. It’s about giving them tax cuts and loans so they can keep growing and keep hiring.”
But it’s mostly not true. The claims of Cantor, Obama and other small-business boosters are based on outdated research and a simplified view of how jobs are created.
It is no coincidence that Obama cited the job-creating powers of small business in connection with his new lending program. Research on job creation by small business, starting in 1981, has been used to justify periodic splurges of aid to small businesses, such as the current one: Small Business Administration spending has risen from $528 million in 2008 to $6 billion this year.
That research by economist David Birch, still cited by the SBA, found that firms with fewer than 100 employees were responsible for 80 percent to 90 percent of job growth. But Birch’s work has been questioned. Other researchers showed that his data counted local outlets of big companies — supermarkets, fast-food restaurants, even bank branches and retailers — as small businesses. Independent small businesses actually accounted for 38 percent of job creation in the years Birch studied, roughly in proportion to their share of total employees.
It is also a fallacy to argue that jobs created by the smallest businesses last a long time. It turns out that nearly as many jobs are wiped out by small businesses going bust as are created. Since 1992, firms with fewer than 500 employees created 4.1 million jobs a year, while losing 4 million jobs, according to the Labor Department.
“In sum, the research on small business and job growth does not support the notion that small businesses produce a significantly larger share of net new jobs than their share of employment,” Jane Gravelle said in a September Congressional Research Service report.
And according to research she cites, jobs created by small businesses are lower-paying, and they have fewer benefits, worse working conditions and less security.
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