It's new businesses that create jobs, not necessarily small businesses.
Politicians of all stripes have learned you can't go wrong pledging to do more for the nation's small business owners.
From Nancy Pelosi to Michele Bachmann, it's a given that small businesses are America's engine of job creation. The small business lobby has managed to leverage this conventional wisdom into a series of tax breaks, loan subsidies and other exemptions that would make AIG or any other recipient of federal bailout money proud.
Too bad it's not entirely true.
Nearly one-third of all Americans work at firms with fewer than 50 employees, so small businesses are vital to our economy. But the notion that they grow faster and create more jobs is a myth that endures despite a growing body of evidence that suggests job creation in the United States has more to do with a firm's age than its size.
If Congress really wanted to jump-start the U.S. job-growth engine, it would focus less on small businesses in general and more on one particular type of small businesses: start-ups and very young companies.
A 2009 survey by the Kaufmann Foundation found that firms that were less than a decade old generated 64 percent of all U.S. jobs created in 2007. Likewise, Maryland economist John Haltwinger reviewed more than a dozen years of data and found that companies less than 10 years old, and start-ups in particular, made substantial contributions to new job growth. Otherwise, he found no systematic link between the size of a firm and net job growth rates.
That's not news to Dan Carr, CEO and founder of the Collaborative, which provides networking and other services for venture capital-backed companies in Minnesota. The Collaborative likes to work with and on behalf of companies that are small, but that want to grow fast.
The problem right now: Venture capital investment is shrinking. The impact on the number of start-ups is unclear at this point, though the number of companies that attended the most recent annual meeting of the Collaborative slipped this year, to 375.
Carr's not asking for the creation of new government loan programs or government guarantees. But federal "angel" tax credits for individuals who invest in start-ups, similar to what Minnesota allows on state returns, might help more new companies get off the ground. So would lifting restrictions on the number of H1B visas, which would allow more foreign-born engineers, programmers and others to enter the United States.
"The idea that you can add a program and pour money into it and create jobs, that only works sporadically," Carr said. Creating companies is much more difficult, he said, but the payoff is potentially greater. "In Minnesota, 365,000 people work at venture capital-backed companies," Carr said.
Census Bureau data show almost 55,000 jobs were created at Minnesota companies less than a year old in 2005. It goes without saying that start-ups are generally small businesses, so score one for the small business lobby. But not all small businesses are start-ups.
Haltwinger found that the average employee of the smallest U.S. firms works for a company that is 11 years old. The average employee of the largest U.S. firms works for a company that is 28 years old. The difference between job creation in either firm is minimal.
The most recent issue of the Region, which is published quarterly by the Federal Reserve Bank of Minneapolis, provides a comprehensive review of how the notion of small business job creation first took root, and its subsequent debunking.
The author, Phil Davies, cites a U.S. Treasury Department analysis of unpublished data showing that companies with fewer than 50 employees lost more than 150,000 net jobs between July 2009 and February 2010, but that companies with at least 250 employees increased their hiring.
If you're thinking this proves big businesses were more resilient during that period, you'd be wrong because, by the U.S. Small Business Administration's standard, any firm with fewer than 500 employees is a small business.
That makes Compellent, a fast-growing publicly traded technology firm based in Eden Prairie that is on track to hit $100 million in revenue this year, a small business.
Dan Grigsby, a Minnesota native who made a name for himself in Minnesota and Silicon Valley by starting, building and selling successful software companies, is about to launch another one with two partners.
"It's the building of new that creates jobs," said Grigsby, who also serves as an instructor and entrepreneur-in-residence at the Carlson School of Management at the University of Minnesota. "But it's much easier to point to an SBA loan that finances a new production line or keeps jobs from going overseas than it is to point to 1,000 10-person start-ups."
Let me say that I have great admiration for small business owners. I have spent more than half my career working at small firms led by owners who felt a deep and personal responsibility for the livelihood of their employees. Not only that, my wife has her own very small business. Like 75 percent of all the small businesses in Minnesota, she has no employees.
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