Industry Market Trends

Why Americans Love Small Business

Aug 23, 2012

Take heart, small businesses: You might be suffering from the slings and arrows of outrageous fortune these days, but Americans still value you highly.

Conventional wisdom holds that small business is the backbone of the national economy. As with all conventional wisdom there's some truth there: small business does, in fact, account for most of the job creation that happens any given year. Of course, that means it also accounts for the most job losses in any given year as well.

But small business is right up there with the family farm, baseball and apple pie in the American psyche. It's good retail politics for candidates to extol the virtues of small business and wax about how government must support small business. Rare is the big company that did not start out as a small business - Apple, Google, HP and many other of today's behemoths can proudly trace their ancestry to a couple of founders in a garage.

According to the 2012 Public Affairs Pulse Survey, 88 percent of adults have a favorable view of small businesses and 53 percent have a very favorable view of small businesses. Only 16 percent say the same about major corporations: "More than half of the survey respondents believe small-business owners tend to exhibit honest and ethical behavior, unlike CEOs of major corporations," explains.

Given widespread uncertainty, many people across the United States regard small business - particularly startups - as the best bet for reviving a stagnant economy.

What really creates jobs are not necessarily small businesses, but "young" businesses, primarily startups. "The only group that disproportionately creates jobs is startups," Ron Jarmin, assistant director for research and methodology at the U.S. Census Bureau, told Business Insider.

While startups account for only about three percent of U.S. employment, Jarmin noted "they are responsible for nearly 20 percent of the gross number of jobs created year to year."

Robert Litan, vice president for research and policy at the Kauffman Foundation, puts the importance of startups to job creation even more plainly, telling Business Insider that "the net new jobs from start-ups can be credited for all the job growth in the U.S. over a stretch of roughly three decades, starting in the late 1970s."

Long-term employment is the province of large businesses, which do, in fact, account for "the majority of employment in the U.S.," according to Jason Faberman, senior economist in the Economic Research Department of the Federal Reserve Bank of Chicago. So if you want to get a job, find a startup. If you want to keep a job, work for a big firm.

At least some of the blame for the economic woes of recent years can be attributed to the fact that the number of companies less than a year old (i.e. startups) has fallen from 4.1 million in 1994 to 2.5 million in 2010. Since 2006, so-called "employer startups," small businesses that actually employ people rather than simply one person, such as a consultant or freelancer, has fallen 27 percent. A one-man business doesn't do much to bring unemployment down.

In general, as startups go, new job creation goes. Which is why a recent study from the Kauffman Foundation, dedicated to studying and encouraging entrepreneurship, is a bit disheartening. Owners of startups have grown more pessimistic over the course of 2012, with 40 percent of entrepreneurs expecting the economy will contract over the next 12 months, up from 31 percent in the first quarter.

The silver lining is that startups are largely a young person's game, and that youth equals optimism. Fully 98 percent of the 18- to 30-year-old survey respondents were "confident" their business would see higher profits next year, whereas 31- to 40-year-old entrepreneurs were more sanguine about their prospects, with only 83 percent feeling "confident."

Underlining the pessimism is the survey's finding that while "35 percent of owners say their business is understaffed, only 21 percent plan to make at least one new hire in the upcoming months."

Nobody's predicting that the importance of small businesses, especially start-ups, will decline in coming years. In fact, nearly everyone would like to see more new businesses being founded. Yet the decline in startups also means there will be fewer businesses to grow and mature into larger firms, the way fewer children now means fewer adults later. And that's never a good thing.