What Is the Actual Impact of Small Business on the Economy?

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Small-business confidence is at a record high says a recent survey of more than 2,000 small-business owners conducted by CNBC and SurveyMonkey. Even with a competitive job market and looming trade war, 33 percent of respondents said they plan to add more employees within the next year.

This data is further supported by the U.S. Bureau of Labor Statistics’ findings—which indicate an employment-population ratio of 60.5 percent in July, the highest on record since January 2009.

The Trump administration has clearly made job growth one of its pillars—as shown by legislation such as the Tax Cuts and Jobs Act signed into law last December which provide tax relief to small businesses.  

Amidst all the optimism of job growth by small businesses is one glaring issue; small businesses are struggling to find and hire quality talent. In a recent study from the NFIB, 51 percent of small businesses are finding few or no qualified candidates for their available jobs.

The inability of small businesses to find and hire quality talent seems to contradict the increase in employment, which poses the questions: Are small businesses really the driving force behind the U.S. job growth rates? If not, are they really the backbone of our economy?

We’ve all heard the claims that small businesses drive our economy, but let’s take a quick look at the validity of that notion.

Classifying Small Businesses: The Major Caveat

Drawing conclusions about the impact of small businesses within the context of the national economy are incredibly difficult, and it’s one of the underlying issues with statistics and sweeping generalizations about the state of small businesses.

Labeling a business as small or large is imperfect—the SBA, a federal agency designed to support small businesses, even struggles to classify small businesses in a meaningful way at the macro-level.   

They use average annual receipts and number of employees to create a threshold (use this Size Standards Tool to see if your business is considered small by SBA) based on the industry within which a business operates.

While individual businesses can discover their designation within their industry, it’s inefficient at classifying small businesses on a broader scope.

For the SBA’s small business reporting, which is a frequently cited resource on the impact of small businesses, it classifies a company as small if it has fewer than 500 employees. However, it’s difficult for any business to exceed 500 employees, even ones that many would consider large.

There simply isn’t a perfect solution for defining a business as small or large across multiple industries. Even within this article, statistics and implications about the effect of small businesses are based on data provided by resources using their own classifications for small business. This caveat is important to remember when you see or hear claims about small businesses. 

Small Business vs. Large Business: By the Numbers

With that disclaimer out of the way, consider the following numbers reported by the SBA in their 2018 Small Business Profile using the 500-plus-employee classification for small businesses and the US Census Bureau (Reports use data as far back as 2015).

  • There are 30.2 million small businesses in the U.S. accounting for 99.9 percent of all businesses—leaving roughly 30,000 businesses labeled as large.
  • Service industries (Professional, Scientific, Technical, etc.—excluding Public Administration) account for 8.58 million of the 30.2 million small businesses or 28.4 percent of all small businesses.
  • Small businesses created 1.9 million new jobs in 2015 out of a total of 2.7 million accounting for approximately 70 percent of all new jobs.
  • 1.1 million of those small business jobs were created by businesses with fewer than 20 employees or 57.9 percent of all small business jobs.
  • 24.3 million small business are classified as Non-employer Firms or businesses without paid employees (self-employed) making up 80.5 percent of all small businesses.
  • In 2015, small businesses employed 58.9 million people or roughly 47.5 percent of the private workforce—meaning large businesses accounted for approximately 65.1 million private employees.
  • In 2015, the annual payroll for small businesses was $2.55 trillion which was approximately 40.7 percent of the payroll for all businesses—meaning payroll for large businesses made up $3.7 trillion or 59.3 percent of the total annual payroll.
  • Using the annual payrolls for small and large businesses divided by the total employees of each designation, we discover that the average payroll for small business employees in 2015 was $43,288 compared to $56,827 for employees of larger firms.

Small Business vs. Large Business: Takeaways

After looking at the numbers, it’s clear to see that both small and large businesses play critical roles in our economy. While there are substantially more small businesses (1,000 x more) than large in the U.S., large businesses actually outpace small businesses for total employees and annual payroll.

One of the most interesting takeaways from the research was that small firms (fewer than 20 employees) were the driving force behind both job growth and job loss.

Additional research from the United States Census Bureau showed that employer firms with fewer than 20 employees had an average job creation rate of 20.8 compared to an average of 12.6 for firms with more than 20 employees. Further, these smaller employer businesses had a job destruction rate, or job loss rate, that was twice that of larger firms.

Moreover, firms with 1-4 employees accounted for 73 percent of new businesses and 76.5 percent of failed businesses in 2015. One can postulate that these smaller firms are what we’d consider “startups” based on the volatility and disproportioned business entry rate.

We can then conclude that startups are the driving force behind small business growth and jobs—which poses the follow-up question: If small businesses are the backbone of our economy and startups are the backbone of small businesses, are startups the backbone of our economy?