Reputation of small business job creation intact

Two recent news stories have challenged the universal belief that small businesses are the job creators.  An AP story on February 17 was titled, “The Truth is That Small Businesses Are Not Good At Creating Jobs.”  Seven days later a New York Times story’s heading said, “Small Companies Create More Jobs?  Maybe Not”. 

But before you swear off shopping with locally-owned small businesses and throw all your support to big box stores, I’ve read these two stories and the data and conclusions have some big problems.

First the Times story.  The Bureau of Labor Statistics has released a new analysis of jobs data and found that large businesses with 500 or more employees over a 20 year period had employment growth of 29 percent compared to businesses with fewer than 50 workers growing employees by only 10.5 percent. 

The Bureau said that the new data analysis was released on an “experimental” basis.  It must have been an experiment in lying with statistics. 

One can be suspicious of data analysis that targets a specific narrow time period (even with a logical sounding explanation) and also uses a different method for classifying data than the way it has traditionally been classified.   This Bureau “experiment” does both.

According to the Times story, “The figures cover employment from April 1990 – one month after employment reached a high for that economic cycle – through March 2011, just over a year after employment hit bottom after the 2007-9 recession.”

What would have been the results if different start and stop dates were selected or a longer period of time used?   We don’t know if Nathan Clausen, the economist in charge of the “experiment” looked at any other time parameters and found different results.  Or did Mr. Clausen even think his selection of dates would be challenged as a potential problem?  Certainly no one would question an economist’s motive, would they?

Then there is the problem of how data was classified for analysis.  The Times story indicates that the “experiment” did not use the Bureau’s long-time business classification methods and went with a completely new method.  As a result, Mr. Clausen’s findings about jobs created by big businesses differ greatly from all other Bureau studies. 

Because of Mr. Clausen’s methodologies, don’t expect to see this “experiment” appearing anytime soon in a scholarly journal.

Now for AP story.  Actually I only have problems with the interpretation of the research and theme of this story that is shouted in the title: “The Truth Is That Small Businesses Are Not Good At Creating Jobs”.

Here is what the economists, who analyzed over 30 years of data, found as reported in this story.

--small businesses no more than five years old — that's about 40 percent of them — are the only ones that create more jobs each year than they cut.  (The Census Bureau reported that startups accounted for more than 99 percent of the 2.5 million net new private-sector jobs in 2005.)

--the 60 percent of small businesses that have been around more than five years act as a slight drag on the number of jobs available in the United States. They have cut about 0.5 percent more staff than they have added in a typical year.

--big businesses, the ones that get all the headlines for layoffs, have hired more than they have cut — about 0.1 percent in a typical year.

Let’s see.  Small businesses over 5 years old and big business varied by less than one percent in adding or cutting jobs.  Start-up small businesses are the only ones creating jobs.  How does that justify the headline, “The Truth Is That Small Businesses Are Not Good At Creating Jobs”.

More troubling is that the AP reporter (not identified) included bogus research by the National Federal of Independent Business (yes, the reporter used “Federal” instead of “Federation”) claiming that small businesses contributed none of the 243,000 new jobs in January.  A more reliable and non-partisan research organization, ADP National Employment Report, found that 56% of the January new jobs came from small businesses with less than 50 employees.

In following the incorrect theme of the story, the AP reporter included anti-regulation rhetoric as an explanation for why small businesses weren’t creating jobs.  That sealed my assessment of this story.  My guess is that the reporter, following an editor’s instructions, wrote the story with the purpose of supporting the Congressional and GOP Presidential mantra on “job killing regulations”.  Yes, this kind of thing actually happens in news organizations.

Well, I think I’ve had enough fun debunking these two stories.  You can now go back to your love of small businesses.  Two incorrect stories haven’t turned the business world upside down.