Small Businesses - Creating Jobs

While small business job creation isn’t as strong as we’d like, it’s stronger than many people think. Since the recovery began, small and midsize companies have been producing more jobs than their larger counterparts and creating them at a faster pace than during the recovery from the 2001 recession. But because small business employment hasn’t yet caught up to where it was before the recession began, the perception that small employers aren’t hiring endures.

This matters more than you might think. Since big companies and small companies each account for about half of private sector employment, employment growth is usually strongest when both are creating jobs. Knowing which one is lagging the other helps Washington figure out what policies we need to boost employment growth.

Let’s look at the data. The ADP (ADP) Employment Report, a monthly analysis of employment at more than 300,000 private businesses using ADP payroll services, shows that companies with up to 49 workers employed 2.6 percent more people in March 2012 than they did in July 2009, when the economic recovery began. Similarly, businesses with 50 to 499 workers employed 3.2 percent more people last month than they did at the start of the recovery. Companies with 500 or more workers, however, employed 0.2 percent fewer people this March than in July 2009.

The Intuit (INTU) Small Business Employment Index, a monthly reporting of the number of people working at about 70,000 companies that have fewer than 20 employees and that make use of Intuit Online Payroll shows a similar pattern. The Intuit Index was up 4.7 percent from July 2009 to February 2012. By contrast, the Bureau of Labor Statistics’ measure of U.S. non-farm employment, which includes employment at larger businesses and in the public sector as well as at small businesses, increased by only 1.9 percent.

Job creation at small companies has also been pretty robust when compared with the previous recovery. In the 33 months since the current recovery began, small employers added 2.6 million jobs, a 2.9 percent increase in employment, ADP figures show. By contrast, in the first 33 months of the recovery from the 2001 recession, small employers added 1.8 million jobs, a 2.1 percent increase.

If small businesses are creating jobs faster than big businesses and faster than they did in the last economic recovery, why do we believe they’re not? Behavioral economists would say it’s because we tend to think about economic recoveries in terms of getting back to the way things were before recessions.

Because the decline in small business employment during the downturn was so large, we have not yet replaced all the small business jobs we lost. The ADP report shows that small business employment is currently only 96.7 percent of what it was just before the economy went south. Similarly, the Intuit index in March was at only 94.7 percent of what it was immediately before the recession. At the current rate of small business job creation measured by ADP, it will be another year and a half—the end of 2013—before small business employment gets back to where it was at the end of 2007.

We all want small companies to take us back quickly to pre-Great Recession employment levels. But policy makers need to try to temper those expectations, because economic growth and job creation are, in large part, self-fulfilling prophecies. If our unrealistically high expectations leave us disappointed by decent, but not stellar, small business job creation, consumers and businesses may lack confidence and cut back, limiting job creation.

Influencing those expectations, however, will be nearly impossible in a presidential election year. The message politicians would have to deliver—hold on for a while more, we’re getting closer—isn’t the kind of uplifting message that gets voters energized, even if it would make sense to economists.