Small Business Ain’t Employing Like it Used to

It’s paradoxical.

While everyone from politicians to the media extol the value of small business to job creation, its share of U.S. employment has been on a long-term decline.

The majority of the private sector labor force now works in big companies, with that fraction at 51 percent in 2009, up from 43 percent in 1946. The share in medium-sized businesses is down slightly from 34 to 31 percent, while the fraction in the smallest businesses – those with less than 20 employees – has declined from 23 percent to 18 percent.

These employment changes result from a subtle, but long-term trend toward more big businesses. While big companies have never been a large fraction of U.S. businesses, and almost certainly never will, they make up a bigger fraction of companies than they did back at the end of World War II. Data from the Census Bureau and the Bureau of Economic Analysis reveals that in 2009, companies with more than 500 employees accounted for 0.3 percent of U.S. companies. Back in 1946, that fraction stood at 0.2 percent.

The growth in big businesses comes at the expense of small companies. Businesses with fewer than 20 workers made up 94.4 percent of U.S. firms back in 1946. In 2009, that share was down to 89.7 percent.

Small business won’t disappear as a major source of employment for Americans. Small scale operations are effective in too many industries for that to ever happen. But, at the same time, I doubt we will ever return to the days when small business accounted for a clear majority of private sector employment.

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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.

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  1. Lots of small businesses use contractors instead of hiring and software solutions also limit the number of hires needed. This doesn’t mean they aren’t creating jobs, but the jobs will get attributed elsewhere (like the fast growing software company making the software).