There’s been a lot of talk lately about how the government needs to do everything possible to support small businesses with special lending funds (like the $30-billion fund currently under consideration by Congress), tax breaks, and more. Why? Because, as many politicians tell us, small businesses are "the engine that creates two-thirds of all new jobs."
There’s only one problem. It isn’t true.
Yes, small businesses currently employ roughly half of America’s workers. However, only a very small number of small businesses actually generate much in the way of new jobs. Most putter along with about the same number of employees year after year after year. Consider the mom-and-pop pizza place (or flower shop, or video store, or filling station) down the street that employs maybe 8 or 10 or 12 people. The total payroll might grow or shrink by an employee or two depending on sales, but the total headcount will generally remain the same. If someone quits or is fired, then he or she is usually replaced, with no net gain in employment.
High-impact businesses — companies that have significant revenue growth and expanding employment are a rare phenomenon, whether they are small businesses or large.
According to a 2008 study conducted by the Small Business Administration, "High-impact firms are relatively old, rare, and contribute to the majority of overall economic growth. On average, they are 25 years old, they represent between 2 and 3 percent of all firms, and they account for almost all of the private sector employment and revenue growth in the economy." The study further found that larger businesses of 500 employees or more contributed 42.7 percent of new jobs among high-impact firms, while small businesses with fewer than 20 employees contributed only 33.5 percent of new jobs among high-impact firms.
The point is, it makes little sense to pursue shotgun legislative methods (such as the aforementioned $30-billion lending fund) aimed at broadly helping all small businesses. It makes far more sense to selectively identify the relative few high-impact firms of all sizes and in every industry, whether small or large, and to focus our efforts on helping them. In this way, we’ll get far more bang for our buck and avoid wasting precious resources on businesses that have no desire to grow or to hire more employees or expand their operations.