'Micro' firms playing big employment role

October 24, 1994|By Knight-Ridder News Service

That old saw about small business being the engine of job growth isn't true anymore. Now the growth is at really tiny firms, those with less than five workers, that the government calls "microbusinesses."

From 1989 through '91, jobs at firms with five to 500 employees -- the traditional definition of small business -- actually declined by more than 2 million, according to the Small Business Administration.

But at microbusinesses, employment exploded by 2.6 million, the SBA said in a recent report.

Add in the 122,000 jobs added by large businesses -- those with 500 or more workers -- and the economy added 681,465 jobs in 1989-1991, despite the recession.

The SBA's Office of Advocacy, the government's chief small-business proponent, drew the figures from Census Bureau data.

Previously, the SBA said, it had relied on information from a private firm, Dunn & Bradstreet, which did not allow as fine an analysis, especially of jobs at microbusinesses.

The SBA analyzed how many jobs were affected by the births of new firms, expansions of payrolls, contractions, and deaths of companies. However, while the advocacy office detailed 4 million job cuts at firms with five or more workers, it offered no data on job cuts at firms with four or fewer workers.

Among microbusinesses, 965,324 jobs were created by new firms and 1.2 million jobs were lost when firms died. But it was expansions of payroll at microbusinesses that really mattered: They added 2.8 million jobs, the SBA said.

"Without the growth and expansion of firms with zero to four employees, the recession would have been much worse, and there could have been over 2 million more unemployed workers," Jere Glover, the SBA's chief counsel for advocacy, said in a statement.

"What is disturbing is that virtually every other category lost jobs," Mr. Glover said. "We don't know what's causing the decline, but it's notable. We're going to be looking into it."

For years, the SBA has talked about the job-generating capacity of its constituency, small businesses, and it routinely produces data to back up its assertions. This is the first time, however, that businesses with four or fewer workers have been cited by the SBA.

The data were greeted by surprise in some quarters, skepticism in others. Many small business advocates embraced them.

"It's been our position for quite a while," said Stephen Markowitz, executive director of the 5,083-member Small Business Association of the Delaware Valley. "Among members of our group, the fastest-growing segment is companies that have fewer than seven employees."

A spokeswoman for the National Association for the Self-Employed said the figures confirm the group's own research. "This is not new news to us. We've said all along that small business is the job-creating segment of the economy," said Susan Whitt, director of government relations for the NASE. "More than half of our 300,000 members are self-employed and 85 percent employ fewer than five workers. . . . We see home-based businesses as the business front of the future."

She said that a large number of those businesses are run by people who have left big companies.

William Dennis, chief researcher for the National Federation of Independent Business in Washington, said the SBA's findings are "quite consistent" with his organization's own assessment. "Very small businesses and new starts tend to be job generators during periods of economic downturn," Mr. Dennis said.

The SBA's measures of job creation have been controversial for years and not everyone accepts the agency's pronouncements.

Given the cyclical nature of business, it may be incorrect to draw broad conclusions based on short-term activity, said Mr. Dennis. Big companies trim workers in tough times and hire when times are good. Those large swings may not be evident in smaller companies.

Scott Schuh, an economist at the Federal Reserve in Washington, noted that the nation was nearing the peak of expansion in the spring of 1989 and was in "a large trough" of recession two years later.

Mr. Schuh, co-author of a recent study that challenged the data underlying previous SBA studies, said the SBA at least appears to be using the best data.

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