Newspaper Page Text
THE ISLANDER, JULY 6, 2009, PAGE 15
Small Businesses Most Likely to Lead Economic Recovery
By Brian Headd, Economist, The Small Business Advocate
During the last year the
media has begun to pay close
attention to the role small busi
ness plays in job generation.
That is because amid the moun
tain of previously disap-pointing
economic statistics, small busi
nesses provide some interesting-
contrasts. While recent job loss
es are widespread, small busi
nesses’ historical overall rate of
net job creation makes them a
key player in solving our labor
market woes. And the number
of newly self-em-ployed, whether
by choice or not, still offer glim
mers of hope.Unless your age is
measured in single digits, you
probably have direct knowledge
that the labor market has had
its ups and downs.
The U.S. Bureau of Labor
Statis-tics (BLS) reports that
nonfarm, private sector employ
ment peaked in December 2007
at 115.8 million then fell to 109.5
million by May 2009. During
this period, job losses from mass
layoffs (more than 50 layoffs
from one location) num-bered
3.6 million, up 66 percent over
the preceding 18 months. The
loss of over 6 million net jobs is
a problem that needs a solution.
Where will the new jobs come
from? There may be clues in the
recoveries from the two most
recent economic downturns, in
1991 and 2001.
When considering small
business employment, remem
ber that there are two kinds
of small businesses: those with
out employees (or non-employer
businesses), and those with paid
employees (or employer busi
nesses). The Office of Advoca-cy
estimates that in 2008 there were
23.1 million nonemployer and
6.1 million employer businesses.
When the economy struggles,
A
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the number of nonemployers
tends to increase at higher rates,
while the number of employer
businesses stagnates or declines.
For example, when the economy
was humming along during the
late 1990s, non-employers had
annual increases in the 2 to
3 percent range; as the econo
my limped along from 2007 to
2008, they increased an esti
mated 8.1 percent or 1.7 mil
lion. The change in the number
of employers is not nearly as
sharp. Employers have tended
to have annual increases of 0.75
percent to 1.5 percent when the
economy has done well and neg
ative to flat when the economy
struggles. Employer firms con
tracted by -0.5 percent during
the 1991 downturn and grew
0.1 percent in the 2001 peri-
od.Nonemployer growth is not
sim-ply a response to economic
factors; many personal factors
cause people to go into business
for themselves too. For instance,
self-employment rates increase
with age, income, and gener
ally with education. The number
of employer business start-ups
is affected by the economy, but
again, probably less so than one
might guess. BLS’s Business
Employment Dynamics data
show that the business startup
rate (per-cent of businesses that
quar-
three
20
15
10
o
cr
Job Share: Net Job Creation/Destruction
1-19 Employees
20-499 Employees
500+ Employees
Mid 1992-1993
were new in the
ter) for the first
quar-ters of 2008 aver
aged 2.8 percent, versus
3.0 percent in 2007 and
3.2 percent in 2006. But
new business-es are only
part of the job creation
story. Employment cre
ated by start-ups (minus
the job losses from firm
exits) accounted for
30 percent ofthe pri
vate-sector net employ-
mentincrease from 1993
to 2007, whilecontinu-
ing businesses provided
thremaining 70 percent.
The 1.7 million increase
in nonemployers is a
lifesaver for many indi
viduals and families. But
sincea large portion of
nonemployers work less
than full-time, when
we talk about expand
ing the job market, we
are most interested in with 20-499 employees. The through 2002 they accounted for
employer firms. In the after- smallest firms, with fewer than less than one percent of the net
math of the 1991 downturn, 20 employees, weathered that loss. So a labor solution is more
firms with 20-499 employees storm. The current downturn is likely to be found by studying
2008*
2003-2007
-5
*Through the third quarter.
Source: U.S. Small Business Administration, Office of Advocacy, from data provided
by the U.S. Bureau of Labor Statistics, Business Employment Dynamics.
led the employ-ment expansion,
while the smaller and larger
size classes struggled. During
the 2001 downturn, larger firms
(500 or more employees) experi
enced the greatest net employ
ment losses, followed by firms
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shaping up more like 1991 than the 1991 downturn rather than
2001. Data from the Bureau of the 2001 dip. Our best hope for
Labor Statistics attributed 35 job creation may shape up to be
percent of the net job loss dur- expansion of exist-ing firms with
ing the first three quarters of 20-499 employees.
2008 to firms with fewer than For more information, visit
20 employees, whereas in 2001 www.irs.gov. □
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