Deflating Some Myths of Job Creation

Politicians are forever telling us that most jobs are created by small businesses. It’s a notion that holds great appeal for Americans. We like to think of doughty entrepreneurs who go their own way, create where there was nothing before, and grow their fledgling enterprises into tomorrow’s supercorps.

That sometimes happens — Jobs and Wozniak planting Apple in a garage, Dell building computers in his dorm room, Brin and Page writing code for a blindingly fast search engine in theirs. But those exceptional stories help to create what is otherwise a myth. The fact is that most small businesses are just that — small — and destined to remain so. There were 6 million businesses with employees in 2007, the year analyzed by a University of Chicago study which found that 90% of them accounted for only 20% of all jobs by virtue of having less than 20 workers. A 2008 survey found that 61% had less than 4. The researchers found that between 2003 and 2008, only 3% of the small business universe added more than 10 jobs; 80% added none.

Think of the local businesses in your communities — main street retailers, home improvement contractors, doctors’ offices, real estate agents, plumbers — and you will see why. Most businesses are started by people whose primary urge is to be independent, people who don’t have a burning desire (or much possibility) of growing.

And the marketplace will see to it that most do not. While the small business sector may create most jobs, it also accounts for most job loss. A survey by Case Western Reserve University discovered that more jobs were lost in years 2 through 5 by small businesses than were added, with bankruptcies tilting the scale.

Yet despite this stark reality, in the battle over extending the Bush tax cuts at the end of last year, when politicians droned on about how the increase from 35% to 39.6% for the over-$250,000 income households would be a small business “job killer”, they were spouting nonsense — a myth used relentlessly to hide the truth.

We’re not here arguing for that tax increase — that’s another subject. We are instead making the point that (a) the data above makes it clear that few small business owners take home $250,000 and (b) even if they did, the money saved by keeping the tax rate from rising 4.6% didn’t even save them enough to hire a single employee at the minimum wage.

The other myth endlessly repeated by politicians is that the uncertainty of impending regulations from the government is keeping small businesses from hiring. Trouble is, there is no evidence for this. The lobby for small businesses, the National Federation of Independent Business, focuses heavily on regulation, yet that same organization, which has surveyed small businesses for nearly four decades, reports the primary concern today is not regulations, it is low demand. McClatchy Newspapers, too, canvassed small business owners to determine what was holding them back and reported that not a single one complained about regulations. The problem is that people aren’t buying.

Federal level regulations seldom reach down all the way to small businesses. House Speaker John Boehner’s blog from a few days ago says they do but inadvertently makes the opposite case. Headlined “Small Business Job Creator Backs GOP Bill to Stop ‘Swarm of Major New Regulations’”, he has sought out the non-representative case of a ready-mix concrete outfit that would be affected not by petty regulations directed at him, but by cost increases that would be incurred upstream at cement plants ordered by the E.P.A. to curtail emissions of “ozone, mercury, arsenic, chromium, sulfur dioxide, [and] nitrogen oxide”. Take your pick: cheaper concrete or pollution, but his example hardly pertains to small business in general.

More representative are the comments from a year earlier of this young restaurant owner from Ohio.

It’s the state and local regulations that affect small business most. Just think of all the “onerous and usually pointless” licensing rules, cited in the Wall Street Journal, that are imposed on so many professions, including “tourist guides, funeral attendants, home-entertainment installers, florists and makeup artists” and which prevent people from even applying for jobs. They are blocked by training requirements — sometimes hundreds of hours (700 hours in Alabama to become a manicurist!) — that throw up “needless barriers around occupations perfectly suited for those entering the workforce, mid-career switchers, and pink-slip recipients”.

These are the real job killers.