The New York Times

September 21, 2004
THE ECONOMY

Where Do the Jobs Come From?

By EDMUND L. ANDREWS

WASHINGTON

PRESIDENT BUSH says he loves small business, and small-business owners are overwhelmingly on his side in the election. But entrepreneurs are not yet giving Mr. Bush the one thing he needs the most: a surge in jobs.

For nearly 20 years now, political leaders of all stripes have taken it as gospel truth that small companies are responsible for about two-thirds of all new jobs created in the United States. (Senator John Kerry, who is as enthusiastic a small-business cheerleader as his opponent, outdoes him on this score, crediting the sector with 75 percent of all new jobs.)

First proclaimed in the mid-80's by David Birch, at the time a consultant and lecturer at the Massachusetts Institute of Technology, the assertion always obscured major distinctions between small companies with limited ambitions and new companies based on novel ideas or technology.

An abundance of evidence suggests that fast-growing young companies from up-start retailers to Internet stars like Google do indeed account for a very large part of employment growth. There is also evidence, though not definitive, that small companies have shed fewer workers over the last four years than large corporations.

But even in the more select group of fast-growing start-ups, the small-business dynamo is not what it was during the height of the economic boom. Venture capital funding is a small fraction of what it was before the stock market bubble burst in 2000. Information and technology companies have yet to recover from the dot-com bust. And even fast-growing small companies remain extremely cautious in how they add workers.

Consider Brian Le Gette and Ron L. Wilson II, who co-founded a quirky but booming design company in Baltimore called 180s. Fresh out of the Wharton School of the University of Pennsylvania in 1997, the two built a business on the reinvention of familiar products making earmuffs that are light enough to be both hip and effective for athletes; gloves that can be warmed by blowing into a special conduit; sunglasses that adhere to the bridge of a person's nose.

But even as sales approach $50 million this year, Mr. Le Gette is keeping his work force lean. He outsources all manufacturing and distribution, hiring only "sharpshooters" with specialized experience in areas like design, finance or marketing. Last year, the company added fewer than 30 people, bringing the total number of employees to 100, and Mr. Le Gette plans to add even fewer people next year.

"We anticipate lower hiring," Mr. Le Gette said. "You get into the $60-million range, and you don't need as many people per million of sales. There's an economy of scale and scope at that level."

Does that mean that the small-business job machine is a myth? The issue is important, because political leaders in both parties have tried to justify a wide range of policies by appealing to the needs of small-business owners.

President Bush pushed through generous tax breaks that allowed small companies to write off their investment in new equipment. Partly at the behest of small-business lobbying groups, Mr. Bush has pushed hard for eliminating inheritance taxes. The Bush administration has also rolled back Clinton-era regulations on workplace safety, particularly ergonomic rules for people who work at keyboards, and has tried to revise overtime regulations.

But small companies and big corporations were all shedding jobs from 2001 through most of 2003, and they are still cautious about hiring.

Overall, the percentage of people who work at small companies has remained roughly constant over the last decade, which would seem at odds with an economy where small companies account for the vast bulk of new jobs.

According to the Census Bureau, employment at smaller companies actually climbed more slowly than at large corporations between 1990 and 2001, the most recent year for which data is available. The number of people working at companies with 20 to 100 employees climbed to 20.3 million from 17.7 million, about 13 percent over the 11-year period. But the number of people at companies with more than 500 employees climbed to 57 million from 43 million an increase of 32 percent.

But some analysts say such comparisons miss a key issue: they argue that job creation comes from what Mr. Birch once described as "gazelle" companies young enterprises with pioneering ideas that quickly grow into big companies. A company like Google, which did not exist 10 years ago, already shows up in government statistics as a large corporation.

"The key issue isn't the size of the company but its age," said Zoltan J. Acs, dean of the University of Baltimore's Merrick School of Business, who has studied the issue closely.

"What we know for certain is that much of the growth comes from young companies," Mr. Acs said. Based on an intensive analysis of job flows in 1996, Mr. Acs found that most of the growth in employment came from new companies or new establishments at existing companies. Over the long-term, Mr. Acs estimated, about half of all new jobs come from fast-growing new companies and the other half comes from expansion at existing companies.

There are differences when looking beyond the simple question of size, which is apparent in a recent study by Cordelia Okolie, an economist at the Bureau of Labor Statistics. Ms. Okolie analyzed data from the spring of 2000, the waning days of the economic boom, in two ways. First, she sorted companies by their size at the start of the quarter, in March. Then, she analyzed the same data but sorted the companies according to what size they were three months later.

The first analysis showed that virtually all the job growth seemed to come from companies with fewer than 250 workers. But the second analysis, based on the size of work forces at the end of the quarter, showed that nearly one-third of all additional employment showed up at companies with more than 500 workers.

Either way, small companies seemed to provide most of the additional jobs. But the real job growth did not come from people with dreams of being small-business owners. It came from people bent on building big companies.

"It may not be that the smallest firms create the most jobs per se," Ms. Okolie said. "It may be that the youngest firms create the most jobs. It may be young companies that happen to be innovative and also happen to be small."

That is a distinction that neither President Bush nor Senator Kerry tend to emphasize. But the distinction is important in terms of another important issue in the campaign, job quality. Overall, according to the Bureau of Labor Statistics, average weekly wages are lower at small establishments $627 at companies with 20 to 40 employees in 2003, versus $919 a week at companies with 500 employees and $1,079 a week at companies with 1,000 workers or more.

Likewise, small businesses have been cutting back on health insurance benefits far more than large corporations. According to the latest study by the Kaiser Family Foundation, only 63 percent of companies with fewer than 200 employees offered health insurance benefits, compared with 99 percent of larger companies.

Both candidates support special tax breaks for small companies. Mr. Kerry has promised $170 million in new money for loans to small businesses; a new "jobs tax credit" for small companies that increase their work forces; elimination of capital gains taxes on investments in small companies; and a bigger share of federal contracts for small companies.

Mr. Kerry also contends that his biggest contribution to small business would be his plan to reduce health insurance costs, which have been rising at double-digit rates for several years.

That plan, estimated to cost at least $682 billion, would have the federal government underwrite much of the cost of catastrophic health insurance, which the Kerry campaign says will reduce the cost of health insurance premiums by about $1,000 a year.

Mr. Bush claims to have already increased lending to small business by 50 percent, and he too promises to give small businesses a larger share of federal contracts.

But the heart of Mr. Bush's appeal to small business is on tax cuts and deregulation. Because the vast majority of small-business owners are taxed on company profits as individual income, Mr. Bush's reduction of individual income tax rates effectively reduced taxes for millions of small companies. On top of that, his last tax package quadrupled the amount of money that small companies could immediately write off on purchases of new equipment.

Mr. Kerry contends that his health care proposals would greatly reduce one of the most worrying costs to small-business owners and make it easier for them to compete by offering health insurance benefits similar to those of large corporations.

Small-business owners and executives at large corporations alike are far more likely to support Mr. Bush over Mr. Kerry, who they fear would both raise their taxes and increase regulation.

That said, Mr. Kerry and the Democrats can point to solid evidence that they would not necessarily be bad for entrepreneurship: new companies had one of their biggest booms ever during the Clinton years.


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