Jobs and businesses: The perils of being small
From The Economist print edition
New data confirm that small firms are dragging on the job market
[Greg Ip] EVEN as they heap scorn on big business, Americans and their congressmen retain a place in their hearts for small business. Which is fortunate, since small business need a little sympathy these days. Their travails, however, go some way towards explaining the puzzling weakness of job creation since the recession ended last year.
The contribution made by small businesses to overall job creation is often exaggerated. They do indeed account for most new jobs, but they also account for most job losses. Unfortunately, reliable data that tracks their net employment performance is scarce. The Treasury Department has now helpfully addressed this shortcoming by culling hiring-and-firing data from the Bureau of Labour Statistics by size of establishment. It shows that since the recession began in December 2007, firms with fewer than 50 employees have shed jobs at a rate of 0.4% per month, compared to just 0.2% both at firms with 50 to 249 employees and at larger firms (see chart).
More striking is the divergence since the recession ended, roughly around last June. Since then large firms have added, on average, a net 32,000 or so jobs each month. Medium-sized firms continued to contract, though at a barely perceptible rate. But small firms, which account for about 41% of total employment, continued to lose a withering 158,000 jobs per month.
Alan Krueger, a Princeton University labour economist now at the Treasury Department, has two theories for the divergence in employment between large and small firms: one is that large firms have a lot of fixed costs invested in the training of their employees, and are more reluctant to lay them off. Such costs are lower for small firms. The other factor is the tightness of credit. Large firms have more cash and easier access to the capital markets. Small firms are more likely to have to rely on banks, which have tightened their lending standards. That may be why small firms have done relatively worse now than in the 2001 recession, when their payrolls shrank less than at large firms.
If Mr Krueger is right, loosening credit could be the key to restoring job growth at small firms. To help do this, the Treasury has proposed a $30 billion small-business loan fund. The fund would provide capital to small banks on concessionary terms provided they expanded lending to small business. Originally, the fund was to be financed from the much-criticised Troubled Asset Relief Programme (TARP) but onerous restrictions on executive pay would have deterred participation. Treasury has not specified where the money will come from.
The fund may, however, turn out to be unnecessary. In the past month there have been signs that things are starting to turn round. Commercial and industrial loans by banks shrank by 24% between October 2008 and March, but have levelled off since then, and Fed surveys have found that for the first time since 2007 banks are easing standards for business loans. The latest survey by the National Federation of Independent Business shows a modest uptick in members’ optimism, although more of them still plan to cut employment than to increase it.
The good news for small firms may also be showing up in the jobs data. Non-farm employment rose by 290,000, or 0.2%, in April, the largest one-month gain for four years. Temporary census workers accounted for a quarter of those, but private job creation was widespread. The unemployment rate rose to 9.9%, from 9.7%; this is actually a happy consequence of workers coming off the sidelines to hunt for jobs. Small businesses may at last be ready to hire some of them.
The original article is linked here.