Share of Firms or Share of Employment?

Our elected officials give disproportionate attention to the smallest small businesses when evaluated from the perspective of economic impact. Microbusinesses account for a tiny fraction of GDP and employment, yet our elected officials trip over each other trying to help and praise them.

Why are micro businesses so important to policy makers?

I think the answer lies in the two charts shown below. While businesses with between zero and four employees account for only 5 percent of private sector employment, they make up 61 percent of all businesses with employees. By contrast, big business – companies with 500 or more employees – account for the majority (51 percent) of private sector employment, but comprise less than one percent of companies.

This pattern helps to explain why politicians view micro businesses so differently from many other people. Instead of focusing on the economic impact of different sized businesses, politicians concentrate on the number of companies in each size category.

That perspective makes sense when you are garnering support in an election, but it also makes it difficult for politicians to formulate effective policies. Doing the latter often means concentrating on the minority of businesses that contribute the most to employment and GDP.

share of firms chart

share of employment chart

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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. Hi Scott,

    One thing that’s missing from this is the acknowledgement of how many people (millions) are employed in their own microbusinesses. My question is: does the chart include the “self-employed” or so-called “nonemployer” businesses? Because there’s a bias in government figures right there — that they don’t acknowledge for employment purposes the people who run their own solo businesses.

    I agree that many running for office try to surround themselves with the “small business halo.” They try to justify all sorts of things by invoking the words “small businesses” in their speeches and press releases. The worst are the ones that attempt to justify actions that are openly HOSTILE to small businesses, yet they still invoke “small business” as if they think they can fool us.

    However, big firms aren’t the be all and end all of the universe, either. Nor are the “high growth” firms. Today’s business and employment landscape is much more fluid than this picture suggests. People have multiple ways of earning a living today, and self-employment plays a role often even when people are employed (they are earning much needed income on the side). People move in and out of employment and self-employment, because we all know that big firms can’t guarantee lifetime employment. (Unless you’re a civil servant, of course, and then your view of employment is totally skewed.) Those kinds of nuances aren’t reflected in government statistics.

    – Anita

  2. This data shows the conundrum around government action to stimulate business growth. Something designed to help big businesses could hurt small business and anything designed to help small businesses could hurt big businesses or create opportunities for abuse.

  3. Lionel Bachmann | Model Trains

    One of the problems with politicians is that they are very good at saying popular things in front of a majority to gain support, but their actions are completely different. This goes for both sides. They get media attention for what they say, but you hardly ever hear about it when they do the opposite. Which is why small business is still struggling despite 4 years of politicians saying “we need to help small businesses.”

  4. Thank you for the interesting insight.