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Are small businesses really our economic engine?

Kate Davidson Jun 4, 2014
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How many times have you heard this line – “Small businesses are the engine of job growth in our economy.”

It’s a sentiment politicians of both parties love. But is it true?

“I would say no,” says economist John Haltiwanger of the University of Maryland. “Not, at least, in the way that politicians have described it.”

Haltiwanger says it’s not size that matters, but age. It’s young companies – and not all young companies, just a few – that are engines of job growth. Of course, big businesses add jobs too. Haltiwanger says the economy is full of churn — companies (both large and small) hiring and firing people. In a good year, hundreds of thousands of new businesses create at least one job.

“It turns out most of those businesses either failed or didn’t grow,” he says. “But a small fraction of those businesses really take off. And in the economics literature, we’ve begun to think about those businesses as transformational entrepreneurs.”

Think about your Facebooks, your Twitters. Starting small and growing big is part of the American Dream.

“But in truth, most small businesses are dry cleaners. And dentists,” says Erik Hurst, a professor of economics at the Booth School of Business in Chicago. “Dry cleaners and dentists tend to start small and stay small for almost their whole existence.”

And that may be the perfect size for those types of businesses.

We lavish too much policy love on small businesses just because they’re small, says Jared Bernstein with the Center on Budget and Policy Priorities.

“I think we should help small businesses, say, break into export markets, where they face barriers,” he says. “I think we should help small businesses have access to credit markets.”

He says policies should nurture the survival of businesses. Because he thinks companies that start out small and grow older and bigger are the ones that add the most net employment in the long run.

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