small business vs fortune 500
TRANSCRIPT
Mackendy Pierre-Louis
Local Economic Development- Spring 2013
Small Business Vs Fortune 500 Companies- A Comparison.
The definition of a small business varies in different parts of the globe; Great Britain,
France and Germany have their own definition of what characterizes a small business. In the
United States, a small business is any firm with fewer than 500 employees and generates less
than $7 million in sales. Fortune 500 companies are public companies in the U.S., and are
ranked by sales, assets, earnings, and capitalization (Fortune 500 Law & Legal Def.
USlegal.com). The list ranks only public companies, or those which have issued securities
through an offering and which are traded on the stock market (Fortune 500 Law & Legal
Def. USlegal.com). Both small and Fortune 500s play an important role in the United States
economy. Both employ millions of individuals and together contribute to the largest share of
the country’s gross domestic product (GDP). However, the role of a small business and a
Fortune 500 company pertaining to jobs creation is a contentious topic that is subject to
debate. This paper surveys accessible research data to explore the question whether small
businesses in the United States create more jobs than Fortune 500 companies. The paper
investigates what small business critics are saying, how U.S governments at all levels
perceive small business. It also puts emphasis on the difference in working environment and
job quality between the two.
Small Business and Job Creation in the U.S
There are many scholarly studies and research that support popular claims that small
business plays a very significant role in share of jobs creation in the U.S economy. Neumark,
Wall and Zhang (2011) argue that Birch in his central thesis provides evidence that small
firms are really the primary engine of job growth in the United States. Birch claims that 66
percent of all new jobs between 1969 and 1976 were created with 20 or fewer employees, and
81.5 percent of those by firms with 100 or fewer employees (Birch, 1979; 1981). Later, he
points out that from 1981 to 1985, firms with 20 or fewer employees accounted for 82
percent of employment growth through expansion or contraction of existing firms, and 88.1
percent overall of employment growth (Birch, 1987). Armington and Odle (1982) note that
from 1978 to 1980 jobs in the private sector increased 8.7 percent and approximately 78
percent of these increase occurred in establishments with fewer than 100 employees.
However, according to Birch, small businesses’ share of jobs creation is not static. It varies
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Local Economic Development- Spring 2013
enormously depending on the period studied (Birch, 1989). For example, in 1980, small
businesses’ share declined because large corporations or Fortune 500 companies performed
well. But, since 1980 there has been a shift in the job creation momentum, as large companies
struggled and their share of jobs creation plummeted. Meanwhile, millions of jobs have been
created by small businesses (Birch, 1989). Kirchhoff and Phillips (1988) later re-
investigate Birch; relying on his data, they confirm his findings that small business
contributes to a significant share of total net new jobs in the U.S. economy.
Small firms are less able to survive periods of economic difficulty such as recession
or economic contraction because they lack the access to the financial resources available to
large firms or Fortune 500 companies (Armington & Odle, 1982). At the same time, results
indicate that small firms make a greater contribution to job creation during recessionary
period (Kirchhoff and Phillips, 1988). One simple explanation is that recessions spur new
business startups. Stangler (2009), for instance, provides an analysis as to why there are good
reasons to expect recessions and bear markets to open opportunities for new small business
startups. In the United States, particularly during times of turbulence, companies lay off
employees or go out of business: this usually encourages entrepreneurship.
Strangler (2009) explains that because increased in unemployment often concentrated
among large companies, it can free up pools of human capital in two ways: first, unemployed
individuals with some measure of experience may perceive a competitive opportunity to start
a new company; second, entrepreneurs may also target the unemployed as a potential pool of
labor force. This explains why small businesses contribute to a higher percentage of net jobs
creation when the economy is experiencing a downturn or recession. Nevertheless, although
small firms do create jobs in turbulent economic times, they have a limited employment
fertility rate which means they never entirely make up for the job lost by large corporations in
the labor market. In a study of small business fertility rate during the 1982-1984 recessionary
period, it was observed that large corporations lost 950,000 jobs during that period; small
firms, nonetheless, were only able to replace 680,000 of those (Birch, 1989).
More recent data from two relevant sources the Bureau of Labor Statistics’ Business
Employment Dynamics (BED), and the U.S Census Bureau’s Statistics of U.S Business
(SUSB) support the conventional wisdom that small businesses generate most new jobs. BLS
research statistics demonstrate that a net of 1.5 million jobs were lost in 2008 and 68 percent
were from small business, but the data also show that about 65 percent of net jobs creation in
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the private sector in the past 15 years were from small businesses (Headd, 2010). On the
other hand, SUSB figures show that small businesses accounted for nearly 90 percent of net
new jobs growth through 2006 (Headd, 2010). Small business net share in employment
growth however is not uniform, and their share of growth is often influence by geographic
factors. Armington and Odle (1982) notice that small firms tend to thrive in weaker and
declining industries (i.e., manufacture, agriculture and retail). In these industries, small firms
usually employ a higher-than-average share of workers and have a much higher share of
growth than in fast growing industries such as mining, transportation, finance and services.
They add that in growing regions small firms’ share of growth is less than their employment
rate (Armington & Odle, 2010). This according to them seems to be the results of high rate
employment losses from small establishment demises, which are the consequence of
increasing share of employment by large firms in these regions.
Critics of Small Businesses; what the Evidence Reveals
As clear as the evidence may appears, many still question whether small business is a
very significant job engine for the U.S economy as popular perception often portrays it.
Critics against small businesses argue “to portray small businesses as the engine of job
growth is to vastly overstate their role (Critics’ opinion. Bloomberg.com, Oct 2012).” To
defend their arguments, they highlight all the loopholes and tax benefits provided to small
businesses. They bring four defensive arguments forward: First, small businesses destroy as
much jobs as they create, and their share of employment is usually less than Fortune 500
companies; second, to avoid paying corporate taxes, many small-business owners’ only
report profits on their individual tax returns; third, the way small businesses are structured, it
is sometimes impossible to designate them as either small or large, and many businesses
designated as malls are not engaged in traditional small businesses activities, Instead, they
are partners in hedge funds, law firms and private-equity shops, or they are highly paid
actors, athletes, speakers and authors; fourth, small businesses enjoy a host of tax breaks,
including the ability to immediately deduct many costs as a business
expense. (Critics’opinion. Bloomberg.com, oct 2012). Despite the many dissenting views
“which may prove to be relevant in some circumstances”, it is evident, as Stangler (2009)
puts it, that small firms play an important role in digging the U.S economy out of recessions.
In time of economic recessions, small business jobs growth usually exceeds that of
large firms. Contrary to what critics highlight, their share of employment growth is usually
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lesser than Fortune 500 companies. Headd (2010) observes that during the 2001 economic
downturn, firms with 20 to 499 employees experienced 43 percent of the net employment
losses, firms with fewer than 20 workers 7 percent, and large firms including Fortune 500
firms 50 percent. As the economy began to improve in 2002, firms with fewer employees
created net new jobs while large firms continues to shed jobs, but at a slower pace as did
firms of 20 to 499 employees. Research statistics have even shown that small businesses have
higher net employment growth rate when the U.S. economy begins to recuperate after a
downturn. As an example, Shane (April, 2012) mentions that in a monthly employment
analysis of 300,000 private businesses using Automatic Data Processing (ADP) payroll
services, it shows that in March 2012 companies with 49 workers or more employed 2.6
percent more people than they did in July 2009, when the economic recovery began.
Similarly, businesses with 50 to 499 workers employed 3.2 percent more people in March
2012 than they did at the beginning of the recovery (Shane, April 2012. Bloomberg
Businessweek). Companies with 500 or more workers, however, employed 0.2 percent fewer
people in March 2012 than in July 2009 (Shane, April 2012. Bloomberg
Businessweek). Furthermore, in non-downturn periods, BED data show that small firms
account for around 60 percent of net new jobs and SUSB data show a larger figure of around
75 percent (Headd, 2010).
Localities, States, the Fed and Small Business
Headd (2010) reports that in 2006, small businesses contribute to an equal share of
employment in the overall U.S economy as large firms or Fortune 500 companies (e.g., small
firms employed 60 million and large firms 60 million of the country’s labor force
respectively). The small business sector represents an important source of employment for
most localities (if not all). Conscious of this fact, all local governments have instituted some
form of job creation assistance program in their economic development policy to either
encourage small existing businesses to expand, attract new business establishments or to
prevent businesses from failing in their jurisdiction. Hillsborough County, Florida for
example has a job incentive program designed to promote job creation in the area by offering
a wage reimbursement to small business owners (Hillsborough County News Release, Sep
2011). Through the program, the County dedicates up to 50 percent of three months’ total
salary of new jobs created, an equivalent of 3,900 per new employee to boost small business
jobs creation (Hillsborough County News Release, Sep 2011). It is estimated that the program
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will encourage the creation of about 200 jobs, offering a total of 500,000 to local small
business (Hillsborough County News Release, Sep 2011). If a County government is ready to
dedicate hundreds of thousands of dollars to support and promote small businesses, there
must be some advantages associated with it. Armington and Odle (1982) comment “an
intrinsic part of a community; small business is more responsive to local influences, more
willing to adapt to local conditions and less likely to migrate to other locations.”
During election campaigns, politicians always put forth their desire to support small
businesses. The Obama administration’s aspiration to extend the Bush tax cuts for families
earning less than 250,000, for instance, is not only aimed at helping the working American
middle class, but the small business sector as well. Beside localities, the federal government
and the states make funds available (e.g., loans, grants, tax benefits and venture capital) to
assist small businesses. In 2010, the U.S Congress passed the Small Businesses Job Act or
(Lending Fund Act). The act is designed to provide capital to qualified community banks and
community development loan funds (CDLFs) to support small business lending (Small
Business Lending Fund. Treasury.gov). There are many organizations put in place to help
small businesses. These can be either governmental in nature (e.g., Small Business
Administration "SBA") or not for-profits organizations (e.g., chamber of commerce). These
organizations may exit at the local level to serve local small businesses’ purpose or at the
state and federal level to serve a broader purpose. The small business Administration (SBA)
is a federal agency independent in nature. It is there to aid, counsel, assist and protect the
interests of small business, to preserve free, competitive enterprise and to maintain and
strengthen the overall economy (SBA mission statement. SBA.gov). Local private institutions
or associations also often provide loans and venture capital to encourage new small business
ventures in their community. All these attentions and efforts put toward helping small
business development indicate that they do play a significant role in creating jobs in the U.S
economy.
Small Business and Job Quality
Let’s leave the job creation debate to cover another topic that also pertains to small
business: job quality. The number of jobs created by an employer is not the only thing that
matters (Halmilton & Medoff 1990; Neumark, Wall & Zhang, 2012). Comparing the quality
of jobs created by small firms and those created by large firms, these authors argue that small
firm jobs are less desirable because they tend to exist for a shorter period of time, pay lower
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wages and have less generous fringe benefits in term of health insurance, vacation and
pension plan (Halmilton & Medoff, 1990; Neumark, Wall & Zhang, 2012). In addition, small
firms tend to have poorer working condition and provide fewer jobs training (Halmilton &
Medoff, 1990; Neumark, Wall & Zhang, 2012). Headd (2010) refutes the argument that small
businesses provide inferior jobs, maintaining that large and small firms have similar shares of
part-time employees. For example, about 21 percent of small firms’ labor force were part-
time employees compared to 18 percent for large firms (Headd, 2010). He also provides a
delicate explanation why small firms have a slightly higher share of part-time employees
“consider a firm with two employees that wants to increase employment by 25 percent; a firm
with one employee would add one employee part time. Whereas, a firm with 500 employees
would add 125 employees full time to achieve the same increase (Headd, 2010).”
On the other hand, Headd (2010) does support the argument that small business jobs
are less desirable. In contrast, he brings forward two different reasons why small firms’ jobs
are less desirable. First, small firms tend to fill the niches of the labor market that are
undesirable and often have high unemployment rates (e.g., unskilled employees and
minorities). Second, small firms employed more individuals with low educational attainment
compared to larger firms (Headd, 2010). Despite the detrimental epithet attributes to small
firms jobs, Birch (1989) notes that employees experience more job security working for a
small firm than a large one. He continues “employees going to work for a Fortune 500
company are less likely to have their jobs at the end of next year than they are if they go to
work for a small start-up company (Birch, 1989).” One way to examine the essence of
Birch’s statement is to go back to Headd’s argument that small firms tend to fill the niches of
the labor market that are un-deserved (i.e., the unskilled, minorities and individuals with low
educational attainment). The disparity in job security therefore suggests that Fortune 500
companies tend to have a more skilled and educated workforce. An educated and skilled
workforce tends to enjoy greater mobility, to have more demands for his or her labor, and
more job options. It makes perfect sense if an employee has less demand for his or her labor
in the market. He or she has a higher chance of experiencing joblessness. This employee will
certainly hold firm to his or her job and that no matter what the job conditions might be.
Conclusion
Based on the many scholarly evidences, there is no doubt that small businesses are an
important force in the U.S economy. Small businesses’ impact on the economy can be felt
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when an economic downturn or a recession surfaces. In time of recessions when businesses
of all types are filing for bankruptcy, laying off their employees or closing down their
facilities. This may eventually encourages more entrepreneurial quests which in turn give rise
to small business start-ups. As a result, small firms often lead Fortune 500 companies in jobs
creation during economic downturns. The role that recession play in encouraging new firms
formation and in return the role these firms play in enhancing back the economy led Stangler
(2009) to make this comment on the most recent 2007 recession “despite the current
recession, there is a reason for hope; good things do grow out of recession.” Most of the
Fortune 500 companies that are now competing with small businesses started as small
firms and most came into existence during a bear market or recession. Microsoft and
Walmart started as small firms and then grew to become the big, global conglomerate that
they are today. Moreover, as the data show in this paper, jobs creation is not static, it involves
some up and down. During a downturn, small businesses usually produce more jobs. In non-
downturn period, sometimes small business lead Fortune 500 companies in shares of net jobs
creation, sometimes their shares are equal, and sometimes Fortune 500 companies do well.
Nevertheless, one thing to keep in mind is that all the attentions given to small businesses by
policy-makers, and the efforts put forward by private associations and governments at all
levels to support the small business cause, encouraging small business ventures validate the
popular notion that small businesses do actually play a significant role in creating jobs and in
boosting our country’s economy.
References
Birch L. D (1989). Change, Innnovation and Job Generation. Journal of Labor Research.
Fortune 500 Law & Legal Def. Retrieved (March, 2013).
From http://definitions.uslegal.com/f/fortune-500/
Business Administration “Mission Statement.” SBA.gov. Retrieved (March, 2012).
From http://www.sba.gov/content/mission-statement-0
BusinessWeek. Retrieved (March, 2013). From F:\small-business-job-creation-is-stronger-
than-we-think.htm
Headd B (March, 2010). An Analysis of Small Business and Jobs. SBA Office of Advocacy.
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Local Economic Development- Spring 2013
Hillsborough County News Release. Fund Still Available for Small Business & Job Creation
Program. Retrieved (March, 2013).
From http://fl-hillsboroughcounty.civicplus.com/DocumentCenter/Home/View/409
Kirchhoff B.A & Phillips B.D (1988). The Effect of Firms Formation and Growth on the Job
Creation In the United States. Journal of Business
Neumark D, Wall B & Zhang J (Feb, 2011). Do Small Business Creates More Jobs? New
Evidence for the United States Establishment Time Series. The Review of Economics and
Statistics. 93 (1). pp 16-29
Odle M. & Armington C. (1982). Small Business How Many Jobs. The Brooking Review,
Vol 1. No 2.
Shane S (April 26, 2012). Small Business Job is Stronger than we Think. Bloomberg Small
Small Business is not a Job Engine (Oct 2012). Retrieved (March, 2013). From F:\time-to-
debunk-the-myth-of-small-business-as-job-engine.html
Small Business Lending Fund. Treasury.gov. Retrieved March 2013.
From http://www.treasury.gov/resource-center/sb-programs/Pages/Small-Business-Lending-
Fund.aspx
Stangler D. (June, 2009). The Economic Future Just Happened. Ewing Marion Kauffman
Foundation
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