Is the Small-Biz Sector Smaller than We Thought?
By Ilya Leybovich
Small business plays a much smaller role in the U.S. economy than is generally believed, a new report claims. Should we reevaluate American entrepreneurship, or are there other factors at work?
Small businesses are considered by many to be the backbone of the United States economy, driving net new job creation and productivity while cultivating the entrepreneurial spirit that has come to define our perception of business. However, new data asserts that small businesses constitute a significantly smaller portion of the overall workforce in the U.S. than in other countries.
While the U.S. Small Business Administration estimates that small businesses represent 99.7 percent of all employer firms in the U.S., a new report from the Center for Economic and Policy Research (CEPR) claims that — despite the powerful role of small business in the national identity and the perception of the U.S. fostering strong pro-business conditions — the U.S. small-business sector is actually among the smallest in the world as a proportion of total national employment.
The study, released by the Washington, D.C.-based think-tank this month, determined that only 7.2 percent of the U.S. workforce is self-employed, thus ranking the country second-lowest in self-employment among the 22 affluent democracies assessed. Although the U.S. outpaces Luxembourg, which has 6.1 percent self-employment, it falls far behind Italy (26.4 percent), the United Kingdom (13.8 percent), the Netherlands (12.4 percent), Germany (12 percent), France (9 percent) and 14 other wealthy countries.
In manufacturing, the proportion of Americans employed at firms with fewer than 20 employees is 11.1 percent, placing it above Ireland and Luxembourg, but still behind the U.K. (18.1 percent), Japan (20.5 percent), France (18 percent) and far below Greece, which has 36.3 percent of its manufacturing workforce in small businesses, according to the study.
American employment in manufacturing companies with fewer than 500 employees is also near the bottom of the list, with 51.2 percent of the workforce, compared to Japan (79.8 percent), the Netherlands (76.2 percent), the U.K. (67.4 percent) and France (63.7 percent), the CEPR found.
Likewise, American small-business employment in the high-tech services industry ranks low, with 32 percent of the workforce in computer-related enterprises with fewer than 100 employees, as well as research and development, with 25.3 of employees working at smaller firms.
"We think of ourselves as offering the most business-friendly environment in the world, but almost every other rich country in the world does a much better job creating and sustaining small businesses," John Schmitt, a co-author of the report, said in a statement.
What are the possible causes for this disparity between American small businesses and those abroad? CEPR suggests that either small business is a less important indicator of entrepreneurship, or health care costs may be the motivating factor.
"The high cost to self-employed workers and small businesses of the private, employer-based health-care system in place in the United States may act as a significant deterrent to small start-up companies," the report concludes.
This argument posits that certain health care reform measures, such as universal coverage or the removal of employer-paid insurance, would provide a safety net for smaller businesses that might not otherwise be able to afford the benefits that a larger firm can provide.
According to Inc.com, some economists are criticizing the study for presenting universal health care as a solution for building a stronger small-business climate, despite a lack of evidence or support for this alternative in the report's data.
In addition, while the U.S. falls relatively low on most of the CEPR report's rankings, the handful of countries rated even lower do provide universal health care in one form or another, suggesting the correlation between health care and small-business success may be tenuous, at best.
Inc.com cites numerous other factors that may be responsible for America's smaller proportion of small businesses, including "heavy tax burdens, cultural differences, namely Americans' willingness to take risks; and a higher per-capita income."
Moreover, small business health can be measured along a broader range of indicators than proportional employment statistics, and the concept of entrepreneurial drive can vary depending on whether one is evaluating "high growth start-ups like Google or mom and pop stores."
Another reason for the purported lower proportion of small businesses in the U.S. may be the country's wealth. As the New York Times' You're the Boss small-business blog states, "Across the 21 countries examined in the CEPR study, self-employment rates correlate -0.67 with the World Bank's measure of gross national income per capita, a correlation that is significant at less than the 1 percent level."
In essence, this means that richer countries have a lower percentage of their workforce under self-employment than poorer ones. In terms of generating long-term wealth, the small-business sector may have exceeded the need for a higher proportion of the workforce.
Are small businesses playing a large enough part in the U.S. economy, and if not, what is the best way to increase their role? Let us know what you think in the comments section below.
Resources
FAQs: Frequently Asked Questions
U.S. Small Business Administration, September 2008
An International Comparison of Small Business Employment
by John Schmitt and Nathan Lane
Center for Economic and Policy Research, August 2009
U.S. Small Business Sector One of the Smallest Amongst Comparable Countries
Center for Economic and Policy Research, Aug. 3, 2009
Is the U.S. Entrepreneurial Self-Image Skewed?
by Josh Spiro
Inc.com, Aug. 19, 2009
Does Universal Health Care Encourage Small Businesses?by Scott A. Shane
You're the Boss blog, (The New York Times), Aug. 12, 2009
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