Small Business Employment Share Shrinking for a Good Reason

small business employment

Source: Created from data from the U.S. Census Bureau

Big business now employs the majority of private sector workers. Small business’s share of private sector employment has fallen from 54.8 percent in 1987 to 49.2 percent in 2011. This shift has occurred largely because big business has gotten better at preserving jobs.

The figure above uses Census Bureau data to calculate the small business fraction of employment over time. As you can see, with the exception of the 2001 to 2004 period, small business’s share of employment has been trending downward it peaked in 1987.

Employment is the result of both job creation and job destruction. When firms are started or grow, they often create jobs. When companies shut down or shrink, they often destroy jobs. Employment rises if job creation is larger than job destruction, and falls if job destruction exceeds job creation.

A good analogy is the level of water in a sink. Job creation is like the water coming out of the faucet, job destruction is akin to water going down the drain, and employment is similar to the water level. If job creation is higher than job destruction – more water comes out of the faucet than goes down the drain – employment rises. If job destruction is higher than job creation – more water goes down the drain than comes out of the faucet – employment falls.

Now think of large and small firm employment like double sinks in a fancy bathroom. Big business is the one with the faster rising water level. According to Census Bureau data, between 1977 and 2011, employment at businesses with fewer than 500 employees increased 60.2 percent. But at businesses with 500 or more employees, employment increased 80.7 percent.

The difference in the rate of employment growth at big and small businesses explains why small business accounts for a smaller share of the labor force in 2011 (49.2 percent) than it did in 1977 (52.2 percent).

But what’s driving relatively higher employment growth at big companies?

The answer: A large decline in big company job destruction.

Census data show that both big and small firms created fewer jobs in 2011 than in 1977 – the number created at small firms declined by 4 percent, while the number created at large firms dropped by 11 percent. Both big and small firms also got better at job retention. However, big companies improved by far more, reducing their job destruction by 43 percent, as compared to 24 percent at companies with fewer than 500 workers.

Small business’s share of employment has declined over the past three-and-a-half decades for a “good” reason. Big business has reduced substantially the number of jobs it destroys through layoffs and firm closures. As a result, big company employment has risen faster than small company employment.

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.