22 October, 2012

Small business is NOT the job engine of the economy

Time and time again you'll hear it: small business employs more people; small business creates more jobs.  It's a mantra that appeals to anti-corporatists of whatever political stripe.  But it's not true.

A recent article in The Economist reports that most job growth in the US has come from mid-size firms (US$10m-$1b annual revenues; okay, not my idea of mid-size).  I wondered what the answer might be for NZ.  Using the government's linked employer-employee data tables, I  looked at job numbers by industry sector and firm size in December 2000 and December 2010 (the latest year-end data available).

If we look at all industries (including public administration, healthcare and education), what do we find in 2010?
  • Firms employing less than 20 people accounted for 31% of all jobs.
  • Firms employing 20-99 people (mid-size in NZ terms) provided 32% of all jobs.
  • Firms employing more than 100 people represented 47% of all jobs.
  • Firms employing less than 20 people employed 85,000 more people than in 2000.
  • Firms employing 20-99 people employed 62,000 more people than in 2000.
  • Firms employing more than 100 people employed 171,000 more people than in 2000, ie. 54% of nett additional jobs.
Now the obvious counter is to argue that we should discount public sector jobs (I've written before about the massive increase in public administration jobs in the 2000s).  Unfortunately, the statistics don't distinguish by ownership, and let's not forget that there are many private enterprises in healthcare and education.  But let's see how the numbers change when you exclude public administration, healthcare and education:
  • Firms employing less than 20 people accounted for 38% of all jobs.
  • Firms employing 20-99 people provided 21% of all jobs.
  • Firms employing more than 100 people represented 41% of all jobs.
  • Firms employing less than 20 people employed 76,000 more people than in 2000.
  • Firms employing 20-99 people employed 44,000 more people than in 2000.
  • Firms employing more than 100 people employed 84,000 more people than in 2000.
The proportions have changed, but not enough to justify the folklore. So what can we draw from this?  Firstly, politicians and media should stop repeating the myth about small business being the job engine of the economy.  It just isn't true. Substantially more people are employed in mid-size and larger enterprises; more new jobs are added by mid-size and larger enterprises.  And those jobs are more stable.  Detailed figures for job creation, job destruction and employee turnover show that small businesses create lots of jobs, but also destroy lots, and have higher worker turnover.  The bigger the firm, the more stable it appears to be.

We also know that mid-size and large firms are more likely to invest in new products & services, new markets, and new processes. That brings me to my second conclusion: we need more mid-size and large firms, not more small firms.  Fortunately, some parts of government seem to understand this.  Unfortunately, they don't say it very loudly.

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