Industry Market Trends

Can Small Business Save the Job Market?

May 22, 2012

Small businesses are considered the main drivers of job creation in the U.S., but hiring remains sluggish nationwide. Can smaller firms ramp up hiring enough to jump-start the labor market in the near future?

The small business sector has traditionally been the engine of United States job growth, employing the largest share of American workers and accounting for the majority of new jobs. While small business job production has been relatively strong throughout the economic recovery, it has yet to match earlier hiring levels and the labor market continues to struggle, raising concerns about whether small businesses can revitalize U.S. employment.

According to a joint report this month from the National Economic Council and the Small Business Administration, small businesses and new businesses have been responsible for two out of every three net new jobs in the U.S., with the country's 28 million small firms employing 60 million workers - roughly half the entire private sector workforce.

However, small business hiring has experienced a slowdown in recent months. The latest jobs data from the National Federation of Independent Business (NFIB) found that the net change in the index for employment per small firm was 0.1 in April, about half the March reading. On a seasonally adjusted basis, 12 percent of small businesses added an average of 3.3 workers over the past few months, while 14 percent reduced employment an average of 2.9 workers per firm. The remaining 74 percent of owners made no net change in employment.

"While firms have eased lay-offs, they haven't resumed strong hiring. Unemployment claims remain high and seasonal adjustments are off track as hiring, normally done in March and April, may have occurred earlier in the year," the NFIB explains. "The percent of owners reporting hard to fill job openings rose 2 points to 17 percent, one point below the January 2012 reading which is the highest we've reported since June 2008."

Overall, 47 percent of small business owners hired or tried to hire additional staff in the past three months. In the short-term future, 18 percent are planning to increase employment at their firm, while 5 percent plan to make payroll reductions.

"While small business job creation isn't as strong as we'd like, it's stronger than many people think," Bloomberg BusinessWeek argues. "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."

In the first 33 months of the economic recovery, small businesses added approximately 2.6 million new jobs, representing a 2.9 percent increase in employment. This rate of job creation was faster than in the period following the 2001 downturn, when small firms added 1.8 million jobs - a 2.1 percent increase - in the first 33 months of recovery. At the current rate of job creation, small business employment will return to pre-recessionary levels by the end of 2013.

Although conditions have been improving, many companies remain reluctant to hire due to lingering concerns about the economy. A significant number of small businesses are still focused on cutting costs and operating on tighter budgets. Rather than expanding, these firms have had existing employees take on additional responsibilities and work longer hours, and many have shifted projects to freelancers and other independent contractors instead of adding full-time staffers.

"Many small business owners aren't hiring or expanding because the outlook for the economy, or their own companies, is uncertain," the Associated Press reports. "That raises the question of whether small businesses will give the economy the boost that it needs. Economists say that in past recoveries, small companies were the first to hire. When the economy was improving, they were more nimble than large companies because they didn't have the bureaucracy that can slow the hiring process. Their hiring helped propel the economy forward.

"The economy is growing, but that growth has slowed - and so has the pace of hiring among businesses with less than 500 employees."

A major impediment to small business job creation is the declining proportion of younger firms and startups within the larger economy. A report this month from the Ewing Marion Kauffman Foundation found that the number of companies less than five years old accounted for 35 percent of all U.S. firms in 2010, down from 49 percent in 1982. This trend is having a negative effect on the labor market, as young firms created just 31 percent of the country's new jobs in 2010, compared to 44 percent in 1982.

"[The report's authors] previously approached the role of new firms as job creators in 2010, when they published a report challenging the conventional wisdom that small businesses of all ages are the source of new jobs. They found it was young firms - not all small businesses - that fulfill this role," CNN Money explains. "But a declining share of startups could threaten that. In 1980, one in five Americans worked for a young company. It's now one in eight."

Another major obstacle to hiring is that small businesses are having difficulty accessing credit. The limited availability of capital from banks is preventing many companies from expanding and adding jobs. In the Washington Post, Fred Becker, president of the National Association of Federal Credit Unions, argues that eliminating a cap on business lending would enable credit unions to provide more financing for smaller firms and, in turn, boost the labor market.

It also remains to be seen whether recent legislation allowing small businesses to engage in crowdfunding, which provides access to larger pools of small investors via the Internet, will help ease constraints on raising capital by offering new channels of financial support.