September 1, 2014

Job Creation Varies by Small Business Size

job creation varies

Source: Created from data from the ADP Employment Report

Economists often talk about small businesses as if they were all the same size. But “small businesses,” which comprise 99.7 percent of all companies, include everything from single-person companies to 499-employee firms. Treating them as homogeneous doesn’t make a whole lot of sense.

Nowhere does this apply more than to the decision to add workers. The founder of a micro enterprise often makes the choice to add a second employee for very different reasons than the founder of a medium-sized company makes the decision to her hundredth worker.

Given the varied reasons that the owners of different sized small businesses have for adding additional workers, it’s not surprising that hiring patterns weren’t the same at the smallest and largest small businesses during the Great Recession and the not-so-great recovery that followed.

The figure above shows employment as a percentage of November 2007 levels from December 2007 (when the Great Recession began) through November 2013 (the latest month data are available) for establishments with between 1 and 19, 20 to 49, and 50 and 499 employees, using data from ADP Employment Report – a monthly measure of private non-farm employment generated from ADP’s payroll clients that the payroll firm produces in conjunction with Moody’s Analytics.

Among the three sizes of establishments, only those with between 1 and 19 workers currently employ more people now than they did in November 2007. Businesses with between 20 and 49 workers are at 97 percent of their November 2007 levels, while establishments with between 50 and 499 employees are at 99 percent of their pre-recession levels.

As the figure shows, the biggest group of small businesses suffered the largest drop in employment during the downturn. Between the start of the Great Recession and December 2009, establishments with between 50 and 499 employees shed 3.8 million workers, or 9 percent of their November 2007 workforce. By contrast, establishments with between 20 and 49 employees cut 1.3 million workers between the beginning of the downturn and their low point in employment (in March 2010), a drop of 7 percent of their labor force. Establishments with between 1 and 19 workers trimmed 3 percent of their employment between November 2007 and their employment nadir (in December 2010).

The picture shows that when it comes to explaining job creation, observers should avoid talking about small businesses as if they are homogeneous. Small establishments of different sizes vary greatly in how many jobs they cut during downturns and how many they add during recoveries.

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

4 Reactions

  1. I think the only reason why small businesses with really few employees are more likely to hire new employees is the fact that they have a really low employee retainment rate. Since their company is small, the employee does not feel as secure and they tend to leave sooner.

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