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.