In the discussion of why small businesses are not creating as many jobs in the current recovery as they have in past economic expansions, one simple fact has been missed by many observers: small businesses create jobs when they need more employees. And companies need more employees when they sell more products and services.
Data from the recent Wells Fargo Small Business Survey, a quarterly survey of small businesses with no more than $20 million in annual sales, illustrates this pattern clearly. Since Wells Fargo began collecting their data quarterly in the second three months of 2007, the correlation between the percentage of owners who indicated that their business’s revenue increased over the previous 12 months and the percentage who indicated that their business’s employment went up over the same period, has been 0.9. (A correlation of 1.0 means that two numbers move together perfectly, while a correlation of 0.0 means that there is no relationship in the movement of the two numbers.)
While fewer small companies decrease employment than suffer revenue declines and fewer small businesses increase employment than experience revenue increases, the two numbers clearly move in concert. Therefore, if we want small businesses to hire more, we need to help them boost their revenues.
Share of Small Businesses with Rising Revenue and Employment:
Source: Created from data from the Wells Fargo Small Business Survey
I love the graph. It shows the correlation between revenue and employment very nicely. I wonder if anyone has studied the difference between the two lines. That would show how much profits have to rise in order see an increase in employment. I am guessing employers have increased that gap between the two lines. In other words, I bet employers need to see a larger rise in revenue to be willing to hire their next employee. Thanks for the post!
That is not necessarily true. Revenue doesn’t drive hiring, but need does. If a business can increase revenue by being efficient and not need to hire then they won’t no matter how much tbe revenue. The oncreased revenue with less resources is what any business truly desires. This is how profit is made.
You can’t argue with the data…at the same time, many small businesses leave opportunity waiting to have the chance to REACT to rising revenues. The best small businesses prepare for success by building processes and resources that can accommodate growth built by proactively executing a strategy
Yes, please help boost revenues for my small company. 🙂 I would love to hire more employees.
Graph correlating employment and revenue is nice and informative. Small businesses are not capable of creating jobs as long as they earn good revenue. As soon as revenue is generated jobs are there after all they have to expand their business as well.
The graph made this post even more wonderful. Thanks, Scott!
This post is great and the correlating graph is a great value add!