Monday, January 14, 2013

One More Time: It's Not Small Businesses that Create Jobs...'s small YOUNG businesses.

Long time readers are probably getting sick of the topic but it really matters when targeting government efforts at job creation. The sole-proprietor attorney making a couple hundred K in Chattanooga is not going to be creating jobs even if you cut his top marginal tax rate to 5%.

There are millions of people who have small businesses as a way to create a job for themselves and don't want the headaches and/or risks of expanding. There are millions more that are in declining businesses that can't expand. And on and on.

Here's FT Alphaville with a couple different pieces of the puzzles:
The small job creators versus the big non-creators
What’s to blame for the sluggish pace of jobs growth in the US economic recovery?
Citi economists Nathan Sheets and Robert Sockin have found evidence that the woes of small businesses might have something to do with it.

Small businesses are not faring well in the slow US economic recovery. This is a bad thing for employment because they found that small businesses, and particularly young small businesses, are responsible for nearly half of all jobs but about 60 per cent of job creation.

Sheets and Sockin say there are cyclical factors behind the poor performance of small businesses: for example, the downturn in housing affected the real estate and construction sectors, which are mostly small businesses.

It’s the structural factors, however, that are more interesting, and worrying (our emphasis):
First, large firms account for the lion’s share of U.S. exports and, as such, have been better positioned to benefit from the rapid growth of emerging market economies and globalization trends more generally. Consistent with this observation, we find that a depreciation of the dollar systematically raises large-firm employment relative to that of small firms.
Second, we find that large firms tend to be in more capital-intensive industries, which means that these firms have likely benefited more directly from the decline in interest rates that has occurred over the past thirty years.
A third structural headwind appears to have been the ongoing consolidation of the U.S. banking system. This has brought with it a declining role for small banks, which traditionally have been major suppliers of credit to small firms. The upshot has been a sustained decline in the share of credit allocated to the small firm-sector. Our sense is that such structural forces are likely to continue to favor large firms for some time to come.
How do they establish this?

- The contribution of small businesses to both employment and to private-sector GDP has declined in the past 10 to 20 years, in line with falling interest rates. While falling interest rates have helped all businesses, Sheets and Sockin posit that it’s helped big businesses more.

- Technology has led to increased polarisation of businesses along size categories: “our sense is that certain technologies may be tending to make large firms larger and small firms smaller, at least in terms of their employment.”

- The weakening dollar has been less helpful for small businesses because they are more concentrated in the non-tradable sector — that is, they benefit less from being able to export more cheaply, because many of them aren’t exporters at all. The evidence for this, and the consequent effect on small business’ ratio of employment, is striking...MUCH MORE
That last bolded bit ties into the whole rent extraction argument.
Going back to Sept. 2010:
"Think Small Business Is Job Engine? Think Again"

And more recently:
Atlanta Fed: "Gazelles, and Why They Matter"
As I said in " The Death of IPO's and What it Means for You and The Country":
With today's jobs report this topic is going to get spun like a top.
(96,000 jobs 38 months after the recession ended? Come on)

Let's state what should be obvious right up front: Small business is no better at job creation than big business and because of the churn of bankruptcies and closures probably worse on a net basis.

Most small businesses don't grow very fast and can't create jobs.

The key variable, as even a cursory review* of the literature makes clear, is the age of the business.
In particular firm births are correlated with both net and gross job creation and it is only because most new firms are small that small business is credited with job creation.

Because of the facts of who creates jobs, a policy initiative that focuses only on size without taking age of the enterprise into consideration will have little effect other than redistributing wealth to the wrong group of companies....
...*A good place to start is "Who Creates Jobs? Small vs. Large vs. Young" (47 page PDF)
Kelley Edmiston at the Kansas City Fed is also pretty good. (25 page PDF)
A related topic "What Do Small Businesses Do?" by a couple University of Chicago econ guys (64 page PDF)
 And many more (sorry readers)